Ron Paul on ending the Fed

From Sudeep Reddy's interview in the WSJ with Ron Paul on the Fed...

For three decades, Rep. Ron Paul has waged a lonely battle in Congress to abolish the Federal Reserve. But he has more foot soldiers across the nation today, particularly after the financial crisis, who are leading the drive for wider congressional audits of the central bank.

In his new book — “ End the Fed” — released today, Rep. Paul walks through his critique of the central bank and lays out a strategy (briefly) for eliminating it. We sat down with the congressman to hear his views on a money system backed by gold, the Fed’s challenge of withdrawing its stimulus and his legislation to audit the central bank. Excerpts of the interview:

What would a world without the Fed look like?

You’d go back to the day that if you wanted to borrow money to build a house, somebody would’ve had to save some money. You wouldn’t have zero savings and all the credit in the world. That’s just a total distortion of capitalism. Capital comes from savings. The part you don’t use for everyday living which you have left over, you reinvest and you save or you loan it out. We were living with something absolutely bizarre that had nothing to do with capitalism. We had no savings whatsoever yet there was all the credit in the world.

So without the Fed, there wouldn’t be as much credit.

Yeah, it would be different. If you were selling me a car and the car was worth $10,000 and I didn’t want to pay cash, you could take credit from me. You’ve got to have something to measure it by. What is a dollar? We don’t even know what a dollar is. There’s no definition for a dollar. There’s never been a time in law that said a Federal Reserve note is a dollar. That’s the basic flaw. There’s no definition for money. We’ve built a worldwide economy on a measuring rod that varies every single day. That’s why it was fragile, and that’s why it collapsed. There was no soundness to it. So that’s why you have to have a stable unit of account.

If you live in a primitive society, you’d trade goods. And if you wanted to advance, then you would trade a universal good, which would be a coin. But we’ve become sophisticated and smart and say, ‘Oh, you don’t have to go through that. We’ll just print the money. And we’ll trust the government not to print too much, and distribute it fairly.’ That’s often just a total farce....

What if, years from now, we see that the Fed has returned its balance sheet to its old size and pulled that money back from the system? Would that not be a validation of its approach?

There has only been one time that I know of where they have done that significantly, to withdraw anything of significance. That was after the Civil War. They withdrew greenbacks to a degree, they quit printing greenbacks, and they balanced the budget. I don’t think you can find any other time in our history and probably the history of the world. Because it’s an addiction, and the withdrawal is always much more serious than the continuation. The immediate problem of continuing the inflation is always more acceptable than withdrawal symptoms. Politically there will be continued inflation until it self-destructs...

How would an audit lead to ending the Fed?

It’s a stepping stone. I think what’s going to lead to the next step is the destruction of the dollar, just like economic events moved further ahead than my legislative process. I wasn’t getting anywhere. But the economic events demanded that we look into it. So even if this bill passes and we have more information and we’re talking about monetary policy reform, I don’t think that’s the way this system is going to be ended. I think it’ll be ended when it’s a total failure and then it’ll have to be replaced by something....