Ron Paul on Bubbles. Recessions, Depressions, Greenspan, The Fed, Interest Rates, Money Supply and all that Jazz

Ron Paul pummels the hapless pro-Fed representative in this MSNBC discussion about all things Fed and monetary related.

Say what you will about establishing a gold standard....I'm not necessarily advocating it...but Ron Paul's clear and lucid diagnosis of the current bubble and the Fed's misunderstood role in it is spot on. You don't need to be an expert on monetarism and related solutions to be honest about the real problem and its diagnosis.

The gold standard is his solution to the problem...meaning a way to get the Fed to stop doing what it does to knock over the first domino and starting a chain of bad events that undermine the entire system's health and stability. I'm open to any solution to that achieves the purported goals of a gold standard. He stresses currency stability over price stability....something the Fed does not do.

You can tell he's got a rudimentary sense of the Austrian Business Cycle Theory on the brain when he uses words like malinvestment and misdirection in the shadow of critiquing Fed-Hubris.

Too bad he didn't have more time. He'd just gotten done correcting his counterpart on fallacies surrounding the Great Depression and could have gotten more into 19th Century monetary discussions.

Anyway, well worth a listen.

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Submitted by John on Sat, 2008-03-22 17:47
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Baby steps

Would passing an ammendment to balance the budget be a reasonable first step towards making the Fed illegal if it doesn't follow something like the gold standard?

We are the environment. There is no distinction. What we do to the earth we do to ourselves. —David Suzuki

by: Spiritual Lefty - 2008-03-22 18:06 …………

I suppose it would help in part

but you'd never get it to happen. That would force government to spend within its means or levy taxes for every increase in spending...neither of which it wants to do.

by: John - 2008-03-22 19:39 ………… parent •

Perhaps, but...

It seems like it would be a heck of a lot easier to pass than abolishing the Fed.

We are the environment. There is no distinction. What we do to the earth we do to ourselves. —David Suzuki

by: Spiritual Lefty - 2008-03-22 21:49 ………… parent •

Fallacies

He'd just gotten done correcting his counterpart on fallacies surrounding the Great Depression

I didn't quite get that correction. What did he mean by "the neglect of the Gold Standard" in the twenties. I know other countries were dropping it, but how was the Fed neglecting it?

We are the environment. There is no distinction. What we do to the earth we do to ourselves. —David Suzuki

by: Spiritual Lefty - 2008-03-22 18:36 …………

I'm not sure I get it either.....

Paul's point doesn't seem to align with Anna Schwartz' research on the money supply.  She should know.  She Co-authored A Monetary History of the United States, 1867-1960 with Milton Friedman.

 

Since 1914 an actual decline of the money supply has occurred during only three business cycle contractions, each of which was severe as judged by the decline in output and rise in unemployment: 1920 to 1921, 1929 to 1933, 1937 to 1938. The severity of the economic decline in each of these cyclical downturns, it is widely accepted, was a consequence of the reduction in the quantity of money, particularly so for the downturn that began in 1929, when the quantity of money fell by one-third, an unprecedented reduction.

The United States has experienced three major price inflations since 1914, and each has been preceded and accompanied by a corresponding increase in the rate of growth of the money supply: 1914 to 1920, 1939 to 1948, 1967 to 1980. An acceleration of money growth in excess of real output growth has invariably produced inflation—in these episodes and in many earlier examples in this country and elsewhere in the world.

by: All-Time QB - 2008-03-22 19:07 ………… parent •

QB and SL

I'm not good at explaining it. It had to do with WWI when we we temporarily went off the gold standard to spend extra money. When we went back on it, the values were off among currencies like the dollar and the pound and the franc and that caused a lot of problems as well. I think expanded bank credit during the 20s played a role as well.

I guess the long and the short of it is that money supply was considerably higher in 1929 than it was before the war.

Not quite sure how to better explain it.

by: John - 2008-03-22 19:32 ………… parent •

This might help:

I found this at Mises :

Hall and Ferguson trace the roots of the depression to World War I, when the belligerent nations of Europe abandoned the gold standard. Gold payments were resumed during the 1920s but at parities that were generally inconsistent with international equilibrium: The pound was overvalued while the dollar and franc were undervalued, causing a gold outflow from Britain that was worsened by American and French attempts to sterilize gold inflows. Although the Fed did switch to an expansionary policy, for Britain's sake during 1927, it reversed policy a year later in response to gold outflows and advancing stock prices. This reversal is supposed to have initiated the depression by triggering the U.S. stock market crash. The depression then continued to deepen because of falling stock prices and in response to a continuing decline in the quantity of money, which the Fed (influenced by the real-bills doctrine) failed to prevent. In the meantime, Congresspassed the Smoot-Hawley tariff, dealing a serious blow to international trade. Overseas, Austrian and German bank failures added to deflationary pressures.

Faced with massive declines in aggregate demand, depressed nations could hope to recover either by reviving spending through aggressive monetary or fiscal actions or by allowing prices and wages to decline to levels consistent with fallen demand. Germany, one of the two hardest hit nations, expanded both its money stock and government spending (in the unfortunate form of Nazi-sponsored militarization programs). The United States, also hard-hit, took some steps (including the bank holiday and later devaluation of the dollar) to restore its money stock and aggregate spending, but simultaneously instituted the National Recovery Act (NRA), which tended to raise prices and wages, undermining the output and employment gains that demand expansion might otherwise have achieved.

Although the NRA was declared unconstitutional in May 1935, the Wagner Act was passed that same year and was declared constitutional in 1937. This act also placed upward pressure on wages, thwarting employment growth even during a period of fiscal and monetary expansion.

I'll look for Rothbard's explanation. He spends a lot of time explaining the inflationary policies of the late teens and 20s in his book on the Depression. Maybe there's a summary somewhere.

by: John - 2008-03-22 19:37 ………… parent •

Here's economist Robert Murphy on it:

responding to David Frum's critique of the gold standard" :

In truth, the Great Depression can't be blamed on any single cause. As a subscriber to the Misesian theory of the boom-bust cycle, I happen to believe that the Federal Reserve — which was created precisely to smooth out macroeconomic growth just as Frum wants — created an artificial boom in the 1920s by issuing unbacked bank credit. Then, the unimaginably horrible policies of Hoover and then FDR in response to the inevitable contraction and readjustment just prolonged the misery. (Just look at this timeline to see what these two clowns did with tax rates during the greatest economic calamity in US history — and then you'll understand exactly why we look to these years as the greatest economic calamity in US history.)

by: John - 2008-03-22 19:50 ………… parent •

One more:

See here .

Timberlake (225) answers that the "interwar gold standard was not a gold standard. It was an entirely different system than the pre-1914 gold standard that had existed for 100 years. Timberlake brings in Leland Yeager to make the case: "The gold standard of the late 1920s was hardly more than a façade. It involved extreme measures to economise on gold… It involved neutralization or offsetting of international influences on domestic money supplies, incomes, and prices. Gold standard methods of balance-of-payments equilibrium were largely destroyed…"

OK. No more. :)

That's quite a bit to chew on.

by: John - 2008-03-22 19:53 ………… parent •

Jim Rogers on the Fed

I've a suggestion to keep you all occupied.
Learn to swim.
Moms gonna fix it all soon.
Moms comin round to put it back the way it ought to be.

by: ka1igu1a - 2008-03-23 04:56 …………