Conrad Black's Richard M. Nixon: A Life in Full 23

My blog post on Conrad Black's Richard M. Nixon: A Life in Full will focus on money supply and the gold standard.

1.  On page 696, we read:

"Unemployment was low, but inflation had risen from 3.3 percent to 5.5 percent under Nixon, and Arthur Burns, who had gone to the Federal Reserve chairmanship in January 1970, was a monetary conservative.  Nixon urged him to expand the money supply, as he had urged during the 1954 and 1958 midterm elections, but Burns declined to do so (as Eisenhower had).  There was virtually no economic growth through 1970."

When the money supply is expanded, that can mean inflation, since, when more money is out there, companies raise prices.  But some people support expanding the money supply as a means to stimulate the economy.  Nixon sometimes favored expanding the money supply for this reason.  Arthur Burns, however, a "monetary conservative" (as Black calls him), was resistant to this.  Ron Paul was a Presidential candidate in 2008 and 2012, and he often spoke in favor of the gold standard and restricting the money supply to combat inflation.  What did Ron Paul think about Arthur Burns?  On pages 115-116 of End the Fed, Paul states: "Following the election of Jimmy Carter in 1976, [Burns] dearly wanted to be reappointed.  He cut the discount rate and accelerated money growth.  True, he was a Republican, but he wanted to go down in history as bipartisan...Sadly for Burns, the courtship failed.  Even more sadly for the country, the courtship wrecked the dollar further."  Paul apparently did not regard Burns as a man of principle in terms of monetary conservatism, at least after Jimmy Carter's election in 1976.

2.  On page 739, we read the following about the Bretton Woods agreement:

"In 1944, the Western countries had agreed at Bretton Woods, New Hampshire, on a new international currency agreement, based on the U.S. dollar and the backing of the dollar by the gold reserves of the United States.  There was gold in the Treasury of the United States to redeem about one-quarter of the outstanding currency, and there were fixed exchange rates with other major currencies, especially the British pound.  This system had worked well for twenty-five years, but now U.S. gold reserves had declined (from $25 billion to $10.5 billion), Europe was back on its feet, Japan was much more powerful economically than it had ever been, the United States was on the verge of running its first trade deficit in over seventy-five years, and gold was clearly under-priced as a commodity, as the dollar was overpriced as a currency.  Gold played an obsolescent and impossible role now because there were at least six or seven other important hard currencies.  Manufacturing in Japan and Western Europe was now extremely competitive..."

That's Black's explanation of the problems in the Bretton Woods agreement, a sort of gold standard (though Ron Paul in End the Fed refers to it as a "pseudo-gold standard"), which Nixon wanted to end.  These problems included a decline of U.S. gold reserves, gold being under-priced, and the need for the U.S. to compete with Europe and Japan, something that the Bretton Woods standard may have been hindering.
Joan Hoff in Nixon Reconsidered is rather critical of Nixon's policy on Bretton Woods.  Her discussion of the rationale behind ending Bretton Woods overlaps with what Black says: "Faced with a gold drain and a trade deficit, the United States allowed the dollar 'to float' on international markets to increase markets abroad and stop any more speculative pressures against the dollar.  This could not be done without causing even more domestic inflation and had to be offset by some deflationary action to placate unions in the form of wage and price controls" (page 140).  But Hoff argues on pages 143-144 that things did not work out as planned:

"Still another unintended consequence arose from the decision to abandon the Bretton Woods system.  This aspect of the NEP represented a deregulation of international currencies.  Since then, economic regionalism has flourished because three rival trading blocs emerged.  Each established a separate regional monetary order based on the yen, mark, and dollar----a situation that has contributed to exchange rate instability and currency speculation since then.  The increased tension among these three major regional trading blocs will continue until the current global recession is over.  What the world learned following the collapse of the Bretton Woods agreement is that floating exchange rates and freer trade do not go hand in hand.  In fact, instability of the former almost always produces complaints about unfair trading practices and pressures for protectionism.  Yet the intensification of regional international competition based on competing currencies...could result in a worsening of worldwide economic conditions in the 1990s.  There is little doubt that the world needs another Bretton Woods system to stabilize currency exchange rates."

I vaguely understand some of this discussion.  I don't entirely comprehend why countries debase their currency in order to make their exports more competitive.  I did a search online to find an answer to my question.  Some of the articles were too abstract for a layperson like myself.  One comment that I read simply said that debasing currency makes exports cheaper abroad, but it did not explain why.

I think that what I see here is a tension between a desire for flexibility and a desire for stability.  The reason that we ended Bretton Woods was probably that it did not allow for the flexibility that we wanted: it was chaining the dollar (not all, but some) to gold, which was not in great supply, and it was hindering the U.S.'s ability to compete.  But Hoff's concern appears to be that eliminating Bretton Woods led to instability: now that currency is not attached to gold but can float freely, there is not much stability in terms of exchange rates.  And countries are concerned that other countries are debasing their currency in order to give their own exports a competitive edge, a practice that they consider to be unfair, and which can encourage them to retaliate with protectionism.

Mitt Romney's No Apology 5: The Economy

In my latest reading of Mitt Romney's No Apology: Believe in America, Romney focused on economics.  I have two items (and the second item has sub-items).

1.  One reason that I wanted to read this book was that Romney defends the idea of creative destruction in it, and I was curious about how he went about that.  Creative destruction has to do with companies becoming more efficient and productive, and jobs being lost as a result.  For example, when new technology is created, efficiency and production increase, but the technology replaces certain workers and thus puts them out of a job.  Romney's argument is that creative destruction may result in temporary setbacks, but increased efficiency and productivity are good things because they result in more jobs, cheaper goods, and a higher standard of living for Americans.  

I wish that Romney had done a better job of connecting the dots----of showing how more productivity creates jobs, which can employ those who lost their jobs due to creative destruction.  I'm somewhat of a beginner when it comes to economics, and so, while some principles may be self-evident to others, they need to be spelled out to me.  Hugh Hazlitt at least attempted to connect the dots in his book, Economics in One Lesson.  In my post here, I summarize Hazlitt's argument:

"Hazlitt believes that full employment can contribute to production, but he doesn’t like efforts to stifle production in the name of 'full employment'. As far as he’s concerned, efficiency can create jobs. If a machine makes shirts, for example, the owner of a shirt-store may lay off those who sewed the shirts together, since a machine now does their work. But jobs are created to make the machines. The owner can expand his business and hire more workers. And, as more shirts get produced, the price of shirts comes down, and consumers can spend their money on other things, which helps the economy. Jobs are lost due to technology, but jobs are also regained."

I hope that it works that way.  Unfortunately, what comes to my mind is something my high school sociology teacher said after we watched Michael Moore's Roger and Me, which was about General Motors leaving Flint Michigan and the devastation that resulted: "Good jobs were leaving, and new Taco Bells are not going to cut it!"

One point that I appreciated that Romney made was that society should help people to find employment.  He mentions employment centers and language programs for people who don't know English that well.  But Romney also states on page 130:

"...I favor programs that incentivize employers to hire and train people who have been out of work for an extended period of time, who have disabilities, or who have been affected by the failure of a company or industry.  As governor, I was able to establish a program that paid employers $2,000 toward the cost of training anyone they hired who had been out of work for more than a year."

As someone with Asperger's, I appreciate what Romney says here.  But I hope he's serious and proactive about this----that, were he to enter office, he wouldn't forget about the need for such programs and leave people on their own.

2.  On page 149, Romney states: "For us to confidently grow our economy, we must grow our own pool of capital and make it available at a reasonable cost.  To do that, we must preserve the value of the dollar by defending against inflation, rein in government's excessive deficits, simplify taxation, and reduce taxes on enterprise and investment."

Romney makes a variety of points that deserve consideration:

----He says that inflation discourages investment because people are reluctant to invest when they won't get much of a return, due to the value of the dollar going down.  This brought to my mind my reading of Ron Paul's End the Fed, which made me think about the positives and negatives of a tight monetary policy.  See my posts here.

----Romney promotes savings because that enables there to be money for investment.  That reminded me of Hazlitt's argument that tax cuts encourage saving and thus allow for the banks to have more money to lend out for businesses to be created, as well as Ron Paul's argument that people should save and then invest rather than relying on credit.  Romney says, however, that saving does not occur enough in America, and so there is a lot of capital in the U.S. that has been provided to us by foreign companies.  That's why Romney does not support alienating other countries through protectionism----they're the source for a lot of our capital----but he does want for the U.S. to stand up to unfair and inappropriate trade practices.

----Romney states that taxes on corporations can backfire, for corporations, rather than buckling under and paying the taxes, could end up looking for a country where the tax burden is lower.  Moreover, Romney does not think that profits are a bad thing, for he notes that there are companies that use their profits to build the companies, which can result in more jobs.

----While detractors have claimed that Romney's tax plan will raise taxes on the middle-class, Romney in the book appears to oppose any tax plan that will do so.  (Of course, whether his plan will do so or not is another question!)  He favors eliminating the capital gains tax and taxes on dividends and interest for the middle-class----and he states that this "wouldn't cost the government a great deal because most of this tax today is paid by high-income individuals" (pages 143-144).  He also expresses concern that the fair tax could result in "a windfall for the very rich and the extra burden...would fall on the middle class", and he hopes that the fair tax----were it to be pursued----would be structured to avoid that problem (page 145).

----Romney states that the deficit is problematic because it reduces the amount of capital that can be used to start businesses, increases interest rates, and discourages foreign investors, who look at America's national debt in deciding whether or not to invest in the U.S.  I talk some about the national debt here and here.  At the same time, Romney quotes Michael Porter's statement that "controlling government deficits that are not being used to finance productivity-enhancing investments in the economy is perhaps the most direct way in which government can influence the pool of investable capital" (Porter's words on page 148).  While Romney most likely disagrees with President Obama's stimulus, the idea behind it is that it is a deficit that is designed to increase productivity and to invest in the economy.

----Romney says that the government employs the services of the private sector (i.e., through defense contracts) because the private sector is more efficient than the government.  That may be true, in a number of areas, but I think that there are some disadvantages to such a policy.  Private companies can end up getting a lot of money from the government, as did Haliburton and Sallie Mae.  Sometimes, it's cheaper for the government to do the job itself.

Ron Paul's End the Fed 7

I finished Ron Paul's End the Fed.  In my latest reading, Paul contends that the monetary and banking problems of the nineteenth century, which were prior to the Federal Reserve, were due to government policies, such as "periodic suspensions of payment, inflationary wars, crazy price-fixing rules under the bimetallism system, and other forms of debt finance", and that the free market banking system from 1830-1860 was "remarkably stable and safe, with no widespread fraud", contrary to pro-Federal Reserve propaganda (pages 190-191).  Paul wants a situation in which "Markets are self-regulating, responding to the wishes of consumers" (page 190).  And, on page 206, he even proposes that we put "the power of free enterprise to work in the area of choosing which money is best", which may mean that he supports people being allowed to choose their own money.  On the page before, he praises the days when there were "no restrictions on private minters".

I read a couple of pro-Federal Reserve items.  One thing that I read was by economist Edward Flaherty, who was criticizing G. Edward Griffin's anti-Federal Reserve book, The Creature from Jekyll Island.  Flaherty argues that each state having its own bank was problematic (due to such things as counterfeiting and instability in the money supply) as well as tells the tale of how the Banking Panic of 1907 led to the creation of the Federal Reserve.  Flaherty also states that "Conspiracy theorists have long viewed the Federal Reserve Act as a means of giving control of the banking system to the money trusts, when in reality the intent and effect was to wrestle control away from them."  You can read Flaherty's article here, and Griffin's response to Flaherty here.

Second, I read a comic book talking about the origins of the Federal Reserve.  There are other Federal Reserve comic books that I may read in the future, and I actually learned about them from Ron Paul's End the Fed.

In what I read (I read one comic book in its entirely, and only part of another one), some things that I read elsewhere were reinforced, and some things were explained a little more clearly.  I referred a couple of posts back to Paul Krugman's argument that the gold standard was faulty because you cannot control the supply of gold, and so basing the dollar on gold can be unpredictable.  One of the comic books said that the supply of gold and silver expanded at times due to mining and trade, and that there were other times when gold left the country due to trade.  I think that the comic book was arguing that gold lost its value as its supply increased, bringing about inflation, but that deflation resulted when it was scarce.  Gold was having an effect on prices, but there was really no way to control its supply.
Another comic book explained how increasing the money supply lowers interest rates, which is something that I've been wondering about.  When there isn't as much money to go around, banks want to hold on to what they've got, and so they're reluctant to lend it out.  Consequently, they charge high interest rates.  But when there is a lot of money to go around, they don't have that problem, and so the interest rates are lower.

One of the comic books made the point that the Federal Reserve is independent of politics.  But Ron Paul would disagree with that claim, for, on pages 115-116, he says that Arthur Burns as chairman of the Fed pulled some monetary stunts in an attempt to get President Jimmy Carter to reappoint him.  Paul also argues that one reason that the Federal Reserve exists is to support big government----to provide money for government programs and wars, and also to use inflation as a means to solve the debt problem (since, as I said in an earlier post, what was a lot of money when you borrowed it becomes not-so-much-money when there is inflation).

I have much to learn about economics.  But I enjoyed reading Paul's book and writings in favor of the Federal Reserve because that helped me to learn more.  My conclusion, if I have one, is that there are strengths and weaknesses to any system.  That's true with the Federal Reserve, and it was most likely true before the Federal Reserve.  There has to be some legitimate reason for an institution to come into being, otherwise it would not be sold as an idea.  But I would not be surprised if power-plays were (and are) a part of the equation, as well.

Ron Paul's End the Fed 6: Is a National Bank Unconstitutional?

For my write-up today on Ron Paul's End the Fed, I'll talk some about Paul's discussion of the 1819 Supreme Court decision, McCulloch v. Maryland.  On page 167, Paul says the following:

"The War of 1812, with its high debts and extravagant spending, caused financial problems and deficits bad enough that we again faced the choice between centralization and liquidation...Madison, in 1816, created the Second Bank of the United States.  The constitutional argument over this bank in 1819 was of great significance...One side argued, as Jefferson did, that the Constitution gave no specific authority to Congress to establish a central bank.  The other side, the majority in the case, amazingly claimed that Congress had all the powers it wanted except for those specifically denied by the Constitution.  The whole idea of Article I, Section 8, and the Tenth Amendment was totally ignored.  If they are correct in this interpretation, there would have been no purpose whatsoever in putting these provisions in the Constitution."

You can read more about McCulloch v. Maryland here.  Some relevant passages from the Constitution are the Necessary and Proper Clause, and the Tenth Amendment.

The Necessary and Proper Clause is in Article I, Section 8 of the U.S. Constitution, and it states: "The Congress shall have Power - 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."

And the Tenth Amendment states: "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people."

I can see Ron Paul's point that the Constitution only allows the U.S. Government to have the powers that are enumerated by the Constitution, for why else would the Constitution enumerate those powers?  But I don't think that a central bank violates the Constitution, but rather is in the spirit of the Necessary and Proper Clause.  Article I, Section 8 gives Congress the power to pay debts, to borrow money, and to determine the value of money.  If Congress wants to establish a national bank to do these sorts of things, how's that unconstitutional? It's fulfilling its constitutional role!

Ron Paul's End the Fed 5: Credit

In my latest reading of Ron Paul's End the Fed, Ron Paul argues that the Federal Reserve's easy credit encouraged recklessness and thus contributed to the financial crisis.  This may overlap with Paul's point that artificially stimulating economic investment when people have not been saving is a disastrous policy, for how will people buy things when they do not have the money?  And, regarding credit, there comes a time when people have to pay their creditors.  What happens when they are unable to do so?  An example: Those who bought houses that they could not afford.

Ron Paul argues that one way that the Federal Reserve encouraged recklessness was by increasing the money supply in an attempt to reduce interest rates.  So is Ron Paul for high interest rates?  My impression is that he is not.  Granted, he's against reckless loans being made out to people who may not have the ability to pay the money back, but he seems to believe that it's better for interest rates to come down after people invest the money that they have saved.  For Paul, investment is good, but people should invest money that they have saved.  Then, interest rates can come down.

I think that Ron Paul's discussion sensitizes me to how difficult it is to stimulate the economy.  We want for people to spend, for that's what creates jobs.  But, when people are saving, they're not spending right now, and so economic growth is delayed.  But we want economic growth right now, and thus there's the push for credit, for people to spend money that they don't have.  That's fine for right now, but what happens when the debtors have to pay back their creditors and don't have the money?

I think that there's often a hope that the person borrowing will be able to pay the creditors back.  I'm not talking so much about people who use their credit cards at the mall, but rather people who borrow money to start businesses, or who had hope that they would be able to pay back their sub-prime mortgages because the housing market was good and they'd make a lot of money on their homes.  But there are obvious risks: What if the business does not do well? What if the housing market takes a nosedive (which is what happened)?

I'm not sure if Ron Paul is against credit altogether.  I can't see a credit-less society really working, at least not in twenty-first century America.  If people can only invest money that they saved up, I doubt that many people will be investing, for how many have saved up enough money to start a business?  Credit does open up opportunities for more people.  That can help the economy, but it also has the potential to harm it.

(UPDATE: On page 203, Paul says that he's not against credit but wants for it to be "rooted in money saved, not money created."  I don't know what exactly he means by that.  Perhaps he means that, when people save money, there is more money in the bank for loans to be made out.)  

Ron Paul's End the Fed 4

For my write-up today on Ron Paul's End the Fed, I'll use as my starting-point a question that Paul asks Ben Bernanke on page 100:

"I have a question about the GDP.  In the first quarter, our GDP didn't do so well.  It was less than 1 percent [annualized].  Our population growth average is about 1.5 percent.  So, if we have total wealth divided by the population, we actually have negative growth.  Could this not be part of the explanation on why some people feel inequality; that they're not doing as well in the economy."  Bernanke responds that this was temporary and now growth is higher.

I'm interested whenever Ron Paul addresses the issue of income inequality.  Here, he appears to argue that some feel it because the Gross Domestic Product is not keeping up with the increase in population, and thus there are people who have less.  I agree with Ron Paul that, if people in the middle-class were doing all right economically, there wouldn't be as much of a concern about inequality: Why care about how much money the rich are making, when you are doing all right?  But I wouldn't say that the concern about income inequality is only due to a growing population and economic growth not keeping up with that, for I believe that there are other factors as well: America's eroding manufacturing base, for example.

Paul refers to this discussion with Bernanke while talking about his exchange with Bernanke over whether Bernanke regarded economic growth as inflationary.  This did not set well with Paul, who believed that growth was a good thing.  Bernanke responds that he agrees with Ron Paul that productivity leads to less inflation.  At the same time, Bernanke said earlier in the exchange that the growth needs to be sustainable---that "We need to have a pace which matches the underlying productive capacity" (page 97).  This probably means that economic growth cannot outpace the resources that we have to produce goods.

I can't say that I understood the entirety of the exchanges between Paul and Bernanke.  But I do have some questions.  Doesn't Paul himself argue that economic growth is not necessarily a good thing, when he decries that the Federal Reserve is pumping money into the economy?  The Federal Reserve, after all, is doing so to encourage people to start businesses and to produce.  While Ron Paul believes that pumping money into the economy leads to inflation, couldn't the increased productivity that results from doing so bring the prices down?  And shouldn't Paul be agreeing with Bernanke that growth must be sustainable----for Paul himself argues that producing a bunch of goods that few people buy because of their failure to save does not help the economy.  Moreover, Paul speculates that some believe that there is economic inequality because population growth has exceeded GDP.  Couldn't that detail be useful to someone who wants to argue that there should be more money in the economy, since there is currently not enough money to go around?

Ron Paul's End the Fed 3: The Gold Standard

In my latest reading of End the Fed, Ron Paul argued in favor of the gold standard.  He talked about how Alan Greenspan used to be a solid supporter of the gold standard, but Greenspan held a different viewpoint during his time at the Federal Reserve.  Ron Paul narrates that he (Ron Paul) actually asked Greenspan to autograph a 1966 article that Greenspan wrote in favor of the gold standard!  Ron Paul also tells the story of how President Ronald Reagan admitted to him that "no nation that abandoned the gold standard has remained a great nation" (Reagan's words), and yet Paul said that Reagan was "swayed by staff pressure to be pragmatic on most issues" (page 74).

When Ron Paul defends the gold standard and says that the Federal Reserve printing more money results in inflation, it's easy for me to wonder: Why would anyone be against the gold standard, which prevents inflation?  Jack Kemp was often lauded, and yet his support for the gold standard was considered by many in the establishment to be a little eccentric.  Why? The gold standard means less inflation, or lower prices.  Why would anyone be against that?

I did some reading online about the gold standard.  I can't say that I understood everything that I read, but I'll share with you what I did understand.  One reason that some oppose the gold standard is that it hinders the Federal Reserve from pumping more money into the economy, which supposedly stimulates economic growth.  Paul Krugman says in his article here:

"The current world monetary system assigns no special role to gold; indeed, the Federal Reserve is not obliged to tie the dollar to anything.  It can print as much or as little money as it deems appropriate.  There are powerful advantages to such an unconstrained system.  Above all, the Fed is free to respond to actual or threatened recessions by pumping in money.  To take only one example, that flexibility is the reason the stock market crash of 1987----which started out every bit as frightening as that of 1929----did not cause a slump in the real economy."

Wikipedia's documented article on the gold standard made the same sort of point, when discussing the Great Depression.  You can read the article itself for the references, but I'll quote some select passages:

"Some economic historians, such as American professor Barry Eichengreen, blame the gold standard of the 1920s for prolonging the Great Depression.  Adherence to the gold standard prevented the Federal Reserve from expanding the money supply in order to stimulate the economy, fund insolvent banks and fund government deficits which could 'prime the pump' for an expansion...The gold standard limited the flexibility of the central banks' monetary policy by limiting their ability to expand the money supply, and thus their ability to lower interest rates...Others including Federal Reserve Chairman Ben Bernanke and Nobel Prize winning economist Milton Friedman place most or all of the blame for the severity of the Great Depression at the feet of the Federal Reserve, mostly due to the deliberate tightening of monetary policy.  The US economic contraction in 1937, the last gasp of the Great Depression, is blamed on tightening of monetary policy by the Federal Reserve resulting in a higher cost of capital and weaker securities markets, a reduced net government contribution to income, the undistributed profits tax, and higher labor costs...Higher interest rates intensified the deflationary pressure on the dollar and reduced investment in U.S. banks...[T]he New York Fed had loaned over $150 million (over 240 tons) to European Central Banks to help them out with their difficulties. This transfer of gold out of the US acted to contract the US money supply...The forced contraction of the money supply caused by people removing funds from the banking system during the bank panics resulted in deflation; and even as nominal interest rates dropped, inflation-adjusted real interest rates remained high, rewarding those that held onto money instead of spending it, causing a further slowdown in the economy."

According to this article, the gold standard hindered investment during the Great Depression.  This article may also explain one of the things that Ron Paul criticizes in his book----President Franklin Roosevelt's ban on people owning gold.  If less gold was in the hands of the Federal Reserve, then that meant less of a money supply, resulting in deflation.  Ron Paul does not consider deflation to be all that bad of a thing, and, after all, wouldn't many of us love lower prices?  But there are possible problems with deflation.  For example, it can discourage investment, for why would people invest in a business if low prices would prevent them from getting a profit?  (UPDATE: On page 121, Paul acknowledges that both inflation and deflation can cause loss of wealth.)  I read in an economics book a while back that some farmers supported free silver because they wanted inflation, for they needed to pay for their expensive farm equipment, and deflation was inhibiting them from earning enough money from their crops to do so.  Regarding deflation and the Great Depression, even F.A. Hayek, an economist whom Ron Paul admires, said the following:

"I agree with Milton Friedman that once the Crash had occurred, the Federal Reserve System pursued a silly deflationary policy. I am not only against inflation but I am also against deflation. So, once again, a badly programmed monetary policy prolonged the depression. "  See here.

Another reason that some dislike the gold standard is because the price of gold is not easy to control.  Paul Krugman states: "gold is not a stable standard when measured in terms of other goods and services.  On the contrary, it is a commodity whose price is constantly buffeted by shifts in supply and demand that have nothing to do with the needs of the world economy----by changes, for example, in dentistry."

Ron Paul has a variety of responses to these sorts of arguments: that gold has had a consistently high value, that Herbert Hoover pursued inflationary policies, and that taxes (by both Hoover and FDR) and tariffs contributed to the prolongation of the Great Depression.  On page 75, Ron Paul refers to economist Murray Rothbard's argument that "it was not the gold standard that caused the Depression of the 1930s; rather, it was the misuse of the gold standard that led up to it" (Paul's words), and Paul says that Rothbard preferred a gold standard in which people could redeem their currency with gold coins. (UPDATE: On page 111, Paul says that "It was the credit expansion of the 1920s causing the stock market bubble that was the real cause of the crash.")

So there are two (or more) sides to every story!  I have some questions, though.  First, why does a declining money supply have to correspond with higher interest rates?  Second, why wouldn't deflation encourage spending and investment, since prices (and thus costs) are low?

Ron Paul's End the Fed 2: The Janitor and William Jennings Bryan

In my latest reading of End the Fed, Ron Paul talks about the people who intellectually influenced him, and Paul mentions his upbringing and certain economists whom he met, read, and heard.

Another person who influenced Ron Paul was a janitor who worked at his high school when Paul was young.  This janitor complained about the bankers, and Ron Paul says that he (Ron Paul) didn't know enough at the time to probe the janitor about this.  But years later, in thinking back, Ron Paul speculates that the janitor was probably a "product of the Populist-Progressive Era of the late 1800s and the early 1900s", and that the janitor was perhaps "influenced by William Jennings Bryan's populism and attacks on bankers" (page 41).

Ron Paul then talks about William Jennings Bryan.  Paul notes that Bryan was not a champion of "our cause" (page 41).  Paul states that Bryan was not a libertarian, and (although Paul does not say so explicitly, at least not in my latest reading) Paul probably also has a problem with Bryan's opposition to the gold standard and support for free silver.  Yet, Paul expresses admiration for Bryan because Bryan opposed central banking and praised Andrew Jackson's attack on the Bank of the United States.

I liked Ron Paul's anecdote and reflections on Bryan for a variety of reasons.  First, it's eye-opening and sobering to realize that there was a time when the people who are currently up there in years were young, and at that time they themselves knew people who were up there in years.  Time marches on!  I consider those who lived during the time of Franklin Roosevelt to be up there in years, but there was a time when they themselves were young, and the older generation of their day had experienced things earlier than Roosevelt, such as World War I and the progressive movement.  And, like Paul, we can find ourselves in a situation where we move on in years and gain understanding, and we wish that we could have asked the older generation of our youth some questions that in our youth did not occur to us.

Second, I appreciate the fact that Paul acknowledges value in what William Jennings Bryan said and did, even though Paul is clear that he does not agree with Bryan on a lot of things.  I wish people in politics saw value in the other side more often.

Third, it's ironic that, today, many (such as Ron Paul) who criticize the Federal Reserve and central banks tend to support the gold standard, when that was not always the case.  As I write about here, Father Charles Coughlin in the 1930's was a critic of international bankers, yet he also opposed the gold standard.  See also Emanuel Josephson's discussion of a scarcity vs. a surplus economy.  I have much to learn about why the Free Silver movement existed at the turn of the century.  From what I read online and in a book on economics, it had to do with enabling farmers and ranchers to pay their debts.  Free silver would weaken the dollar and expand the money supply and thus make the debts more manageable.  Imagine paying off a debt from (say 1900) with today's dollars.  The debt wouldn't be much because of inflation----what was a lot of money back then is not a lot of money now.  Free silver was championed by proponents as a defense of the little guy against the rich and powerful.  You can read and listen to Bryan's speech here.

Ron Paul's End the Fed 1

I started Ron Paul's End the Fed, which is about the Federal Reserve.  According to Ron Paul, a big reason that a national bank and (later) the Federal Reserve were established was so that money could be pumped into the economy, through printing money and also loans.  Without a national bank, banks are taking a risk when they loan money for people to start businesses, for there is a chance that the businesses would not be able to pay the banks back, and where would banks be then?  Consequently, the Federal Reserve exists to save banks were this to happen.  That encourages the banks to loan money for businesses, which supposedly helps the economy.

But Ron Paul does not care for the Federal Reserve.  He argues that its printing of more money devalues the dollar (whereas Paul contends that the purchasing power of gold has been high).  But what about banks that might go under when businesses are unable to pay them back?  Ron Paul says that banks should be more careful about who receives a loan in the first place!  Paul also says that the money that the Federal Reserve puts into the economy creates an illusory prosperity.  For Paul, it's better for people to save money and then to buy things and invest, and he states that this can bring down interest rates.  When the Federal Reserve lowers interests rates "on a whim" and thus encourages banks to make loans, when people have not been saving, then the result is that "goods that come to production can't be purchased[, b]usinesses fail, homes are foreclosed upon, and people bail out of stocks or whatever is the fashionable investment of the day" (page 30).

I'll stop here.  I was initially reluctant to read this book because I feared that it would be Ron Paul repeating over and over that printing more money creates inflation.  But it's more than that, because Paul seeks to explain the rationale for the Federal Reserve, and then to rebut that rationale.

This Is Herman Cain 3

In my latest reading of This Is Herman Cain, Herman Cain talked about how he saved Godfather's Pizza from bankruptcy as President of Godfather's (essentially, he highlighted to the public what Godfather's was known for----it's quality----rather than trying to be like Domino's, which was known more for its delivery), how he and a friend bought Godfather's from Pillsbury (with the help of loans), and how Herman Cain challenged President Bill Clinton in a forum about Clinton's health care plan and the cost that Cain felt it would impose on restaurant owners.

What I want to highlight in this post, though, is Cain's discussion of the Federal Reserve.  Cain is unapologetic about the fact that he worked for the Federal Reserve, and he does not agree with the Republican Presidential candidates who want to abolish it (though he says that he does not care if it's audited).  Cain supports the Federal Reserve because he believes that it regulates the money supply, and he does not think that the money supply in the U.S. and the world would self-regulate without the Federal Reserve.  At the same time, Cain believes that the Federal Reserve should be reformed because it over-extends itself----as (for example) it seeks to manage unemployment.  Cain states on page 84 that "you cannot manage unemployment, price stability, and our currency with one arrow, and they had multiple targets but only one arrow."

I can't say that I entirely understand Cain's argument, but he does appear to challenge an idea that is promulgated by such figures as Ron Paul: that the Federal Reserve causes inflation by printing a lot of money, and that the money supply will be restricted (and thus inflation will be low) without the Federal Reserve (or so I understand Paul's position).  Cain's point seems to be that the Federal Reserve controls the money supply, and that all bets are off were it not to exist.  Ron Paul probably believes that other things are necessary to control inflation besides the Federal Reserve, such as the gold standard.  I'll be reading his book, End the Fed, sometime in the future, so that will provide me with more of an opportunity to learn about his perspective.