David Frum’s Critique Is Far From Sound

In his weekly CNN column, David Frum argues that “Ron Paul’s money plan is far from golden,” but makes a lot of mistakes in his analysis.

He uses the same tired, old, and refuted Keynesian argument that a free monetary system based on gold currency is too inflexible. He argues the Great Depression happened because the gold standard prevented the government from being able to expand the monetary supply to get us out of the economic recession.

His prescription for avoiding the Great Depression is the Keynesian idea that the Federal Reserve should print up money out of nothing to extend credit to the government (by purchasing Treasury bonds), and that the government could then ramp up spending to stimulate the economy. Frum argues that this could not occur in 1929 because of the gold standard, and the economic contraction slipped into a full-blown depression without government stimulus.

Frum believes, like the defunct Keynes, that a government-sponsored central banking system can ease busts by expanding the money supply, and then take the excess money back out during booms when the growing economy can safely absorb the monetary contraction. This necessarily assumes that you won’t have high inflation during an economic recession.

For the Keynesian scheme to work, inflation must only occur during booms when it can be safely tempered with a monetary contraction. The stagflation of the 1970s, a period of nasty inflation and recession at the same time, proved once and for all that Keynes was wrong. Hayek and Mises predicted the Great Depression and the stagflation of the 70s. For Keynes, it was incomprehensible that stagflation could even occur.

This should have settled matters, but instead, to my great irritation, I have to spend my time refuting Frum’s careless mistakes on CNN’s opinion page. He wants the government to get us out of recessions by expanding the money supply, but what will be his solution if in five years we are faced with a deepening depression AND soaring inflation? Hmmm? As Ayn Rand would say, “Blank out.”

The government couldn’t very well expand the money supply to get us out of the depression. That would exacerbate and already deadly rise in prices. I use the word deadly quite literally here. Families that are already struggling to pay their gas and grocery bills would become destitute. And the government also couldn’t fix that inflation by contracting the money supply- not in the middle of a recession. Like Frum would agree, that would just wreck the economy even more.

Most critically of all, Frum makes the typical Keynesian mistake of starting with the bust, instead of the boom. Again, Ayn Rand would call it “context-dropping.” History did not start in 1929!  We have to ask why the economy slipped into a recession in the first place, and the reason is that America WASN’T on a pure gold standard. The Fed had certainly existed for nearly two decades by the time the economic contraction had occurred.

The Federal Reserve Act passed in 1913 to inaugurate a new era of easy credit and monetary expansion to fuel what the central planners believed would be a never-ending ecomonic boom. Because banks were no longer forced by their limited gold reserves to lend on the objective basis of the real value they had available to lend, the 1920s were filled with runaway speculation and malinvestment, fueled by the Fed’s artificially expanded monetary supply and low interest rates.

If Ron Paul’s gold-standard had existed from the beginning, before the bust AND the boom, the malinvestments of the boom would not have happened, and the bust would not have resulted. At this point in economic history, that assertion should be uncontroversial and widely accepted. Instead the enemies of the gold standard deliberately perpetuate disproven Keynesianism because of their love of the state. As Alan Greenspan wrote in 1967 (before abandoning the principles he stood for when he wrote it):

An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense – perhaps more clearly and subtly than many consistent defenders of laissez-faire – that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other. . . . This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.

But it’s not just welfare statists, it’s warfare statists like David Frum, who are more interested in the power of the printing press to fund endless foreign occupations and military adventurism, than they are in your freedom, your budget, your economic prosperity, or your Founding Fathers who wrote into the very text of your Constitution that Congress has the power to coin money, not that a private central bank has the power to print it.

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