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Paul’s beef with the central bank is a by-product of his longstanding interest in the works of Austrian school economists, most prominently Ludwig von Mises and Nobel laureate F.A. Hayek. Paul was a fan of Mises and Hayek before he entered politics in the mid-’70s, largely as a result of his reading the publications of the libertarian Foundation for Economic Education.
Paul, like the economists he admires, thought it a mistake to have a giant government-run institution trying to fix prices—in this case, interest rates, or the price of loaned money, which is the Fed’s main mechanism for pursuing its stated goals of economic growth, high employment, and relatively stable prices. As a critic of state power, Paul also worries that once a government has total control over paper money that it can create at will, it becomes too easy and too tempting for the state to spend at will. Cash unbacked by gold will flow to help the government out of its jams, pay for its wars, and appease its most powerful private constituents.
To Austrian-leaning libertarians like Paul, this danger makes the Federal Reserve, central banking, and “fiat” money the key libertarian issue. If the government can manufacture all the money it wants, the fight for limited government is over before it begins.
Central to this critique is the Austrian business cycle theory, which helped win Hayek his Nobel Prize for economics in 1974. Hayek, Mises, and contemporary economists such as Roger Garrison of Auburn University and Steve Horwitz of St. Lawrence University argue that low interest rates set by the Fed fool investors and builders into thinking that consumer demand for future goods is higher than it actually is. Cheap money makes producers more likely to launch long-term projects and take on long-term expenses. When low rates are a product of government intervention, rather than a market expression of people’s desire for long-term goods as reflected in their willingness to save now in order to consume more later, those long-term projects—for example, building and buying homes—will turn out to be unsustainable “malinvestments.” Prices in those areas will plunge. Everyone will start to realize that resources were funneled to unprofitable ends. An exaggerated boom will turn into a catastrophic bust.
Austrians believe increases in the money supply don’t always manifest in economy-wide rises in the consumer price index, the standard definition of inflation. The excess cash might instead flow into specific areas of the economy, depending on real-world factors that vary from case to case. In the housing boom and bust, those factors included mortgage lending standards, the actions of the government-created mortgage holders Fannie Mae and Freddie Mac, and reckless securitization of mortgages. In the Fed skeptics’ story about the last decade’s economic expansions and contractions, the housing bubble was a deliberate effort by the Fed to stave off economic troubles that began when the tech-stock bubble burst in 2000.
Who Else Is Afraid of the Federal Reserve?
A small but enthusiastic audience, largely connected with explicitly libertarian institutions, has kept the Austrian theory of Fed culpability alive in the decades since Mises and Hayek left the scene. (Mises died in 1973, Hayek in 1992.) But the Austrians aren’t the only opponents of the Fed’s practices. Although history tends to craft auras of inevitability around what exists, the Federal Reserve would have seemed an exotic and dangerous change in American monetary practice in the 19th century.
According to a popular Fed creation myth, the bank, established in 1913, brought an end to a chaotic, boom-and-bust environment of unregulated banking, replacing it with managed economic stability. This story is widely believed despite the fact that America’s most severe banking crisis and economic downturn, the Great Depression, occurred two decades after the Fed was created. As the popular historian (and no Austrian ideologue) Jack Weatherford wrote in his 1997 book The History of Money, “the final stripping of local banks of their power to control money came not because of financial failures but as a result of political movements to centralize power in Washington.”
Opposition to central banks and paper money runs strong through American history. Many of the Founding Fathers came to despise paper currency after their experience with the quickly worthless Revolutionary War “continental.” President Andrew Jackson crushed the Second Bank of the United States in 1832 in the name of the people. President James Buchanan noted after an 1857 bank panic that “our existing misfortunes have proceeded solely from our extravagant and vicious system of paper money.” The Civil War “greenback,” our first national government pure paper currency, was initially declared unconstitutional until a later Supreme Court bowed to political reality. And then there was the debate over establishing the Federal Reserve itself, in which opponents such as Sen. Elihu Root (R-N.Y.) noted the dangers of a potentially unlimited money supply.
In the postwar era of normality and economic centrism, noisy mistrust of the Fed was the province of gold fanatics, radical libertarians, and financial newsletter writers and readers who saw the bank as a machine the government used to debase the currency and steal from the thrifty. But the Fed also earned the ire of progressive leftists who saw it as the citadel of moneyed interests helping creditors at the expense of debtors by keeping inflation too low. The critique, which was especially audible from the Volcker era forward, is exemplified by the progressive journalist William Greider’s best-selling 1987 book on the Fed, Secrets of the Temple. It follows the grand tradition of the three-time Democratic presidential candidate William Jennings Bryan, who famously wanted to rescue indebted farmers through using cheaper and more abundant silver as money rather than crucifying them on a “cross of gold.”
During a time when the Fed actually lived up to its much-vaunted, often spurious “independence from political pressure”—when Paul Volcker was using the shock therapy of high interest rates and lower money supply growth to crush inflation in the early 1980s—the Fed came under political pressure from across the ideological spectrum. Its critics included Sen. Robert Byrd (D–W. Va.) and Rep. Jack Kemp (R-N.Y.) as well as many members of the Reagan administration. But for most of the tenure of Alan “Maestro” Greenspan, the Fed was broadly seen as doing little wrong.
Yet Paul discovered during his presidential bid that anti-Fed feeling had somehow morphed into a popular youth phenomenon. At an Iowa campus stop in 2007, the candidate and I expressed mutual wonder at the fact that his biggest applause line was not about ending the war but about reining in the Fed. At other Paul events, I’m told, kids burned Federal Reserve notes (dollar bills to you) to show their hostility toward the unrestricted and damaging flow of fiat currency.
As that flamboyant gesture indicates, anti-Fed feeling has long overlapped with powerful populist passions. Sometimes that attaches itself to misleading history and misaimed anger. Conspiracy theorists often cite the fact that the Fed is officially owned by its 12 private member banks as evidence that the whole system is a means for private bankers to mulct the public. But in its creation, purpose, and function, the Fed is a branch of government. Its board of governors is selected by the president and approved by the Senate, and most of its income ends up in the U.S. Treasury. And contrary to claims that the law creating the bank was pushed through Congress in the dead of night before Christmas 1913 solely as a result of a banker’s conspiracy forged on Jekyll Island, the Fed arose from long public and congressional debate.
Opposing something that has long been deemed as essential as air tends to attract eccentric people with eccentric beliefs. When I ask Ron Paul where this unexpected upsurge in youthful disdain for the Fed was coming from, he says the most important source was the website of the Mises Institute, an educational foundation for Austrian economics and libertarian political thought. But beyond the economic arguments against fiat currency, Paul says the biggest feeders of popular fear of the Fed are the conspiracy-minded documentary America: Freedom to Fascism and radio host Alex Jones, staunch opponent of the New World Order. In both cases Fed opposition is part of a general theory of sinister and subterranean forces struggling to keep Americans enslaved.
It certainly was no credit to the anti-Fed movement that Holocaust museum shooter James von Brunn had previously been arrested for attempting a “citizen’s arrest” of the Fed’s governors. And when the U.S. Army Reserve issued a “Force Projection Advisory” in November 2008 specifically targeting that month’s anti-Fed protests for “situational awareness and recommended mitigation measures,” it allowed those on the fringe to feel validation that they were not only right all along but a genuine threat to their enemies.