Review Goes on a Crazed Attack of Ron Paul Monetary Economics
by Robert Wenzel: Jim
Rogers: Don't Pay Attention to Governments
senior editor of National Review, is out with a
vicious hit piece on the monetary views of Ron Paul (Apparently
after studying Austrian economics for two weeks.) The attack can
only be described as ignorant and absurd. Salvadore Dali would be
it should not come as a surprise that Ponnuru assigned this task
to himself. He has a graduate degree in history from Princeton
University, which seems to specialize in monetary quackery. The
economics faculty includes (or has included) such economic cranks
as Paul Krugman (who most recently missed the call on the turning
economy that was right in front of him) and Ben Bernanke, who
as Fed chairman crashed the economy (see here,
and is setting the economy up for one of the greatest price inflations
in the history of the United States.
problems does Ponnuru find with Ron Paul monetary economics? Let
the Fed, his 2009 book, Paul writes that a rotten monetary
system underlies "the most vexing problems of politics." In his
view, any expansion of the money supply counts as inflation, whether
or not prices rise.
He ignores to
mention this is the classic definition of inflation. (Webster's
New World Dictionary 1957) defines inflation as follows: 2. an
increase in the amount of currency in circulation, resulting in a
relatively sharp and sudden fall in its value and a rise in prices:
it may be caused by an increase in the volume of paper money issued
or of gold mined).
goes on to correctly identify other features of Ron Paul monetary
follows the Austrian school of economics, which holds that the expansion
of the money supply (or, in some variants, the overexpansion of
it) is the reason we suffer through business cycles. Loose money
artificially lowers interest rates and misleads businesses about
the demand for capital goods, causing them to invest in the wrong
lines of production. Eventually the "false" or "illusory" prosperity
of the boom gives way to a bust in which these malinvestments have
to be painfully liquidated. Efforts to mitigate the pain merely
prolong the necessary process. In End the Fed, Paul treats
the entire period from 1982 through 2009 as "one giant financial
bubble" blown up by the central bank. (At one point he dates its
beginning to 1971.) Absent his preferred reforms, "we should be
prepared for hyperinflation and a great deal of poverty with a depression
and possibly street violence as well."
Monetary expansion is also, for Paul, a key enabler of what he
takes to be our imperialist foreign policy: The creation of money
out of thin air allows the government to finance wars, as well
as the welfare state. Central banking is a form of central planning,
on his theory, and as such "incompatible" with freedom. Paul allows
that "not every supporter of the Fed is somehow a participant
in a conspiracy to control the world." The rest of them, judging
from comments repeatedly made in the book, have fallen for the
delusion that expanding the money supply is a "magic means to
generate prosperity." Paul finds it baffling that anyone could
hold this absurd view, but attributes it to Chairman Bernanke,
So what does
Ponnuru think of Dr. Paul's economics? He writes:
Almost all of the criticisms Paul makes of central banking, when
stated in the axiomatic form he prefers, are false. To put it
more charitably, he assumes that the negative features that monetary
expansion can have in some circumstances are its necessary properties.
for example, a world in which the Federal Reserve conducts monetary
policy so that the price level rises steadily at 2 percent a year.
Savers, knowing this, will demand a higher interest rate to compensate
them for the lost value of their money. If the Fed generates more
inflation than they expected, as it did in the 1970s, then savers
will suffer and borrowers benefit. If it undershoots expectations,
as it has over the last few years, the reverse will happen. The
anti-saver redistribution Paul decries is thus not a consequence
of monetary expansion per se, but a consequence of an unpredictably
large expansion. For the same reason, monetary expansion does not
necessarily lead to less saving.
that Ponnuru has read perhaps one book on Austrian economics, but
has no deep understanding. It brings to mind a Boston Bruins head
coach who tells the story of taking under his wing for two weeks a
cub reporter who was assigned to cover the Bruins and knew nothing
about hockey. After two weeks, the reporter was writing columns criticizing
the head coach's line changes.
with a steady price level (if somehow that could actually be achieved
over a long period of central bank manipulation) is that such a
price level is the result of three components: Money supply, the
demand to hold cash and productivity. Thus, if the Ponnuru desire
to achieve a steady 2% price level is to be achieved during a period
of high productivity, it would require huge amounts of money printing
and result in massive capital-consumption structure distortions.
have understood this if he had read Murray Rothbard's America's
Great Depression. In AGD, Rothbard points out that prices
were stable for the most part but actually falling in certain sectors
through most of the 1920's, despite the fact that the Fed was printing
money aggressively, because of high productivity.
to think how much more money the Fed would have had to print to
achieve Ponnuru's goal of 2% annual price level increase.
teaches that every dollar printed by the Fed, despite the price
level, distorts the economy. Does Ponnuru need empirical evidence
that this can occur? I direct him to the Great Depression itself.
focusing on a fixed annual price level, Ponnuru fails to understand
the key Austrian insight that ANY money printing, regardless of
the price level results in distortions of the capital-consumption
One of the reasons that most economists of the 1920s did not recognize
the existence of an inflationary problem was the widespread adoption
of a stable price level as the goal and criterion for monetary
policy. The extent to which the Federal Reserve authorities were
guided by a desire to keep the price level stable has been a matter
of considerable controversy. Far less controversial is the fact
that more and more economists came to consider a stable price
level as the major goal of monetary policy. The fact that general
prices were more or less stable during the 1920s told most economists
that there was no inflationary threat, and therefore the events
of the Great Depression caught them completely unaware.
Actually, bank-credit expansion creates its mischievous effects
by distorting price relations and by raising and altering prices
compared to what they would have been without the expansion. Statistically,
therefore, we can only identify the increase in money supply,
a simple fact. We cannot prove inflation by pointing to price
increases. We can only approximate explanations of complex price
movements by engaging in a comprehensive economic history of an
era – a task which is beyond the scope of this study. Suffice
it to say here that the stability of wholesale prices in the 1920s
was the result of monetary inflation offset by increased productivity,
which lowered costs of production and increased the supply of
But this "offset" was only statistical. It did not eliminate the
boom-bust cycle; it only obscured it.
In other words,
after studying Austrian economics for all of two weeks, Ponnuru
has no f'ing clue as to what he is talking about. Austrians understand
problems are caused by money printing, even when the price level
is stable, something Ponnuru doesn't even discuss.
Paul's contention that the Fed has continuously abetted the expansion
of the state – its wars, its welfare, its attacks on civil liberties
– is also false. The federal government uses its monopoly over
the currency to finance very little of its spending.
this, apparently with a straight face, as US debt soars, as it does
during most war periods:
then goes on to pull a Keynesian attack on gold:
The doctor's prescription is as mistaken as his diagnosis. The
drawbacks to a gold standard are well known. If industrial demand
for gold rises anywhere in the world, the real price of gold must
rise – which means that the price of everything else must drop
if it is measured in terms of gold. Because workers resist wage
cuts, this kind of deflation is typically accompanied by a spike
in unemployment and a drop in output: in other words, by a recession
or depression. If the resulting economic strain leads people to
fear that the government may go off the gold standard, they will
respond by hoarding gold, which makes the deflation worse.
This means that
in his two weeks of studying Austrian economics, Ponnuru has also
not read Henry Hazlitt's The
Failure of the New Economics, which pummels the errors in
the paragraph above. I mean Hazlitt pummels the Keynesian thinking
that Ponnuru employs. Here's just the launch of Hazlitt's attack:
III of Keynes's Chapter 2 is less than a page and a half in length,
and yet it is so packed with fallacies and misstatements of fact,
and these fallacies and misstatements are so crucial to Keynes's
whole theory, that it requires more than a page and a half of analysis.
Keynes's argument in this section rests on three major confusions:
1. The word
"wages" is sometimes used in the sense of wage-rates and sometimes
in the sense of wage income or total payrolls.
no warning to the reader as to when the meaning shifts, and Keynes
himself is apparently unaware of it. This confusion runs through
Theory, and gives birth to a host of sub-confusions and
is treated in a Marxian manner as a lumped total, with a lumped
interest opposed to an equally lumped interest of entrepreneurs.
This kind of treatment overlooks both the frequent conflict of
interest between different groups of workers and the frequent
identity of interest between workers and entrepreneurs in the
same industry or firm.
is constantly confusing the real interest of workers with their
illusions regarding their interests. Take this strange sentence
from page 14: "Any individual or group of individuals, who consent
to a reduction of money-wages relatively to others, will suffer
a relative reduction in real wages, which is a sufficient justification
fort hem to resist it." To see how bad this argument is, let us
try to apply it to commodities. We would then have to say, for
instance, that if wheat fell in price relatively to corn, the
wheat farmers would be "justified" in combining to refuse to accept
the lower price. If they did so, of course, they would simply
leave part of their wheat unsold on the market. The result of
this would be to hurt both wheat farmers and wheat consumers .In
a free, fluid, workable economy relative changes in prices are
taking place every day. There are as many "gainers" as "losers"
by the process. If the "losers" refused to accept the situation,
and kept their prices frozen (or raised them as much as "the general
level" had risen), the result would merely be to freeze the economy,
restrict consumption, and lower production, particularly of the
goods that otherwise have fallen relatively in price. This is
precisely what happens in the labor field when the members of
a single union refuse to accept a "relative" reduction of realwage-rates.
By refusing to accept it they do not, in fact,improve their position.
They merely bring about unemployment, particularly in their own
ranks, and hurt their own interests as well as those of the entrepreneurs
who employ them. Keynes remained blind to the most glaring fact
in real economic life – that prices and wages never (except perhaps
in a totalitarian state) change uniformly or as a unit,but always
goes beyond Keynes and tells us that "Central banking is not central
planning...", but then goes in Dali like fashion to discuss a central
planning role for the central bank:
Considerations such as these have led some monetary economists
to favor a rule that would commit the monetary authorities to
stabilizing the growth of spending.
Having run out
of theoretical absurdities. Ponnuru closes with another vicious
attack on Ron Paul:
The Fed could have corrected for this excess and then gradually
reduced the growth rate of nominal spending to eliminate all long-term
starting in mid-2008, it allowed nominal spending to drop at the
fastest rate since the depression within a depression of 1937–38.
It even discouraged the circulation of money by paying banks interest
on their reserves. The consequences of these decisions have been
many and horrible. Among them are booming book sales and credibility
for a congressman who does not deserve them.
And that's the
view you get from a writer who pretends to understand Austrian economics,
but who has clearly not read Austrian economist Murray Rothbard
on distortions in the consumption-capital structure in relation
to price levels and who has clearly not read Austrian economist
Henry Hazlitt who has demolished Keynes' view on wage levels.
suggest that Ponnuru give up economics and take up abstract painting
of elephants. He could likely master that in two weeks.
with permission from Economic
Economic Policy Journal
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