I actually find myself in agreement with something important in Ron Paul’s op-ed on the Federal Reserve, monetary policy, and the crisis, namely his point that central banking is in important ways a form of central planning. To say that “[t]he manner of thinking of the Federal Reserve now is no different than that of the former Soviet Union” is a kind of slander since even Richard Fisher isn’t going to send anyone to the gulag, but I understand what he’s getting at. And he’s basically right. “Dollars” are a commodity that are demanded by market participants but supplied by a monopolist at the Federal Reserve. Since the Federal Reserve is run by finite human beings with flaws, the system is prone to error and when the wrong quantity of money is supplied bad things happen.
One valid way to think about the Fed’s role in the recession is as a central planner who failed:
This abnormal spike in the price of dollars is indicative of a dollar shortage. But dollars aren’t oil. There’s no problem of “peak dollar” or anything. An optimally functioning set of economic planners should prevent this from happening. But they didn’t.
Yet beyond the banal observation that central planning is bad, Paul doesn’t offer an alternative proposal. The current system of fiat money, floating exchange rates, and discretionary monetary policy is more market oriented than the Bretton-Woods system of managed exchange rates was. And Bretton-Woods is much more market oriented than the old time gold standard, which is just straight-up price fixing. So what’s his idea? I believe the “real” free market view is that we should completely abandon government participation in currency and bank regulation. Anyone who wants to set up a bank should be allowed to issue whatever kind of notes he wants backed up by whatever kind of promises he wants to make. That’s fine if it’s what you want to do. But saying we should respond to an economic slump by abandoning the main underpinnings of actual capitalist economies seems strange. The problem seems to me to be that hard-core libertarians want to claim the economic successes of real world mixed economies but don’t want to admit that such economies have a heavy dose of statism and planning at their heart.