Ron Paul Doesn't Want to Violently Overthrow the Fed, He Just Wants to See It Go Away

Breaking: The New Chairman of the House Financial Services on Domestic Monetary Policy & Technology doesn’t really believe in monetary policy!

Rep. Ron Paul (R-Texas), a principled libertarian who ran for President in 2008, held the gavel on his first Subcommittee hearings on Wednesday. He spoke to Aaron Task and me from the House. Paul criticized Bernanke’s current policies of quantitative easing and stewardship of the Fed. “He’s supposed to give us full employment and stable prices, and we have neither.” (Like many of those questioning Bernanke yesterday, Paul seemed to be armed with super-secret inflation detectors that can sniff out rising price levels where the CPI doesn’t. Yes, commodity and food prices are rising. But prices of other things that consumers and businesses spend a lot of money on -- like labor and housing – have been flat or falling.)

People who do business around the world have a choice of currencies they keep and accept – the yen, the euro, the dollar, the Swiss franc. But in the U.S., Americans can’t use what Paul believes to be the optimal currency: gold.  “If you start using gold and silver coins as legal tender, you go to jail.”

Paul and other adherents of the gold standard believe that guaranteeing the convertibility of gold into dollars at a fixed price acts as a bulwark against inflation and the accumulation of excessive debt. When governments and the private sector take on a lot of fixed-rate debt, they find that inflation has the effect of lowering the burden of their liabilities. That mentality, Paul says, has led the Fed to debase the currency. “If you look at the dollar of 1913 [when the Fed came into being], now it is worth two cents on the dollar,” he says. And there’s the threat more devaluation to come. “ If you like paper money, and you want paper money and want to take care of your kids in 30 years, put your money in treasury bills, earn no interest at all and see what that will purchase for you in 30 years.”

Of course, adhering to the gold standard and limiting the money supply can prove to be an inflexible and counterproductive policy, especially in times of crisis. During the Great Depression, when the U.S. left the gold standard, developed countries that stuck to gold longer recovered more slowly. And if the Fed hadn’t been empowered to inject huge sums of cash into the financial system in the fall of 2008, a complete collapse would likely have ensued.

Without conceding the point, Paul counters that the gold standard and hard money policies function as better preventative measure.  "It isn’t so much that the gold standard can automatically correct all the mistakes,” he says. “The gold standard keeps you out of trouble.”  Much of the grilling Bernanke received yesterday on Capitol Hill was partisan in nature. When President Bush was in office, Democrats routinely charged that Federal Reserve Chairman appointed by Bush was tailoring policy to suit the elector and political needs of the White House. With President Obama in office, Republicans are now giving grief to Bernanke, who was reappointed by Obama, for doing the same.

But Paul’s critique of the Fed is more consistent. He routinely calls out Democrats and Republicans, and Fed chairmen appointed by both parties. “There’s a collation here: the big government conservatives get together with the big government liberals, and they spend, spend, spend, and deficits run up. The Fed cries and screams, but then it keeps the interest rates low.” Paul doesn’t give much credence to Bernanke’s repeated calls for Congress to address the nation’s budget deficits. ”All he needs to do is quit buying treasury bills and the interest rates will go up and Congress will quit spending.”

These are unorthodox views. Essentially, he’s saying that what the economy needs right now, with 9 percent unemployment, the housing market in a shambles and demand that is growing but still fragile, is sharply higher interest rates. At his first Subcommittee meeting, as Dana Milbank noted in the Washington Post, Paul called witnesses who have some highly unorthodox views – on monetary policy and Abraham Lincoln.

So here’s the uncomfortable Federal Reserve officials are facing for the next few years. The Chairman of the House Subcommittee on Monetary Policy doesn’t really believe the U.S. should be in the business of having much of a monetary policy. It’s a little like having a confirmed teetotaler overseeing the liquor licensing board. But of course, the metaphor of alcohol and central banking is an apt one – the Fed provides the punch bowl, the fuel for a big party that ends up out of control. And to a large degree, the Fed is getting what it deserves. If Bernanke and his predecessors had done a better job of stopping the economy from blowing bubbles and binging on debt and cheap money, fewer people would questioning their methods.

Daniel Gross is economics editor at Yahoo! Finance.

E-mail him at: grossdaniel@yahoo.com; following him on Twitter @grossd

View his columns here: http://finance.yahoo.com/news/provider-daniel-gross