Ron Paul recently held another hearing
on monetary policy, this
one to explore the importance of interest rate signals in free markets.
This is a very worthwhile topic, as interest
rates are the key signal to markets in identifying the market’s views of
consumption now vs. consumption later – how much of current consumption goods
are to be consumed today vs. used in means meant to support consumption in the
The two witnesses were Jim Grant and Lew Lehrman. There were perhaps a half-dozen congressmen
in attendance. I could not find a
transcript, so I offer no quotes from the hearing – all comments from the
hearing are paraphrased from the testimony.
Any errors, therefore, are mine.
I was disappointed in this hearing, especially the testimony
of Lehrman. My disappointment centers on
the answers to questions raised around the propriety of having a central
bank. Both witnesses found reason to
support a role for an institution granted government monopoly protection in an
area of the market where government intervention causes the most havoc and is
the most destructive.
I will begin with Grant.
He suggests that the Fed ought to be in business to support an objective
definition of the value of the dollar. He
did not say, but presumably by objective definition, he is suggesting the value
of the dollar should be held constant to some underlying commodity or basket of
commodities. He went on to add that the
Fed should not be shooting for specific target interest rates for various types
of credit. He would let the marketplace
determine this. Having said this, he
would not get rid of the Fed, but the Fed should be doing much less than it is
This is an impossibility that Grant is looking for. The minute a non-market actor – introduced by
the government and with all the protections both real and implied that this
government backing provides – begins to act, there is no way to know what
market interest rates would have been absent the introduction of this non-market
actor. If Grant is looking for the
market to set the interest rate signals, why not just allow the market to set
the interest rate signals? Why is it
necessary to have a non-marketplace actor involved in setting market derived
interest rates? There are no true market
signals once this government-backed actor is introduced.
However, of the two witnesses, Lehrman was far more
vocal. It is not only that I disagree
with his view on this subject, but his own words betray the possibility of successfully
achieving this wishful objective.
Lehrman suggests that the Fed is an appropriate institution
if it stays focused on buying business loans instead of government and mortgage
loans – just like what Carter Glass intended when the system was designed in
1913. As part of this charter, the Fed
should maintain the value of the dollar to gold, and limit the commercial paper
to maturities of 90 days or less. Lehrman
is describing the centralization of Real Bills.
Why is it necessary for the government to establish an
institution to provide commercial credit, or even to facilitate the market? Is there some reason this market cannot
function without the government’s involvement?
And if it cannot, does it not suggest that the market does not view this
means of extending credit as efficacious or efficient?
Lehrman emphasizes that the solution today is to embrace the
original Federal Reserve Act of 1913. He
then immediately recognizes that the Fed followed this prescription for only a “very
few moments” where it conducted itself in accordance with Article 1 of the Constitution
sections 8 and 10.
Here Lehrman enters into his own version of cognitive
dissonance. He recognizes that the original
Fed charter was violated almost from the beginning. Every apologist for the Fed, and specifically
those who point to the original act as a good act, ignore this most basic
issue: centralization and monopoly protection will lead to corruption of the
system. Once granted monopoly power, it
was certain that the authorization would be expanded. It was certain that the institution would be
used for means beyond that which was intended.
There is no way to establish a monopoly and expect that the monopoly
will remain within its fence – especially a monopoly over money, the most
powerful monopoly on earth.
Lehrman then adds that the Federal Reserve should be guided
by very careful rules, conducting its policies consistent with the activities
of the free market and a free people.
How is this possible?
How can a few men, armed with statistics and data
that do not in any case
capture the possibilities of the human actors supposedly being measured, act in
a manner consistent with the free market?
Proportionately, the power concentrated in these few men is far greater
than they would enjoy in the free market.
How can this not be distortive?
Upon questioning by Ron Paul, Lehrman argues these purchases
of short-term commercial paper would not be monetary inflation because the
purchase of commercial bills goes to solvent firms. They sell the goods and then repay the loans,
which mature in not more than 90 days. Further, this activity would not affect
interest rates beyond what the markets would have done absent the Fed.
I know Ron Paul doesn’t buy this.
First to the simple item – how can the Fed
enter the market for commercial bills and NOT affect interest rates beyond what
would have happened in a free market?
As to the inflationary
dealt with this.
The issue of the Federal Reserve specifically, and central
banking generally, is the monopoly. There
can be no rules designed that will withstand expansionary pressure by the institution
and the constituents that would benefit from the expansion. There can be no chance that the designers of
the rules will not succumb to the temptation of gains to be had by allowing the
rules to be bent, then stretched, then broken.
During the 1930s, Congress had a choice regarding the
Federal Reserve and the violations committed almost from its introduction in
1914. They could have punished it for
the by-then-obvious fact that it greatly exceeded its charter, or they could
have authorized it to act in the manner it had been doing in violation of its
charter. They chose the latter.
Jim Grant and especially Lew Lehrman somehow believe it will
be different this time. It will
not. To advocate any role for an
institution with money-monopoly power, granted special privileges to compete in
the market, is asking to be walked down the path we have already tread – with equal,
Either you believe in markets or you don’t. Either you believe in price signals from
markets, or you don’t. There is no
middle ground that will remain tame. To varying
degrees, these two witnesses are suggesting there is a middle ground.
Ron Paul wrote the book “End the Fed
He did not write “Manage the Fed.”
It is disappointing, and somewhat curious,
that his singularly unique career in Congress would come to an end on such a