Why I Hate Ron Paul

In a recent debate, the candidates were asked what they would be doing that night if they weren’t running for president. Rick Perry said he’d be at the shooting range. Gingrich was confused about whether there was a basketball or football game on that night, but he was sure that he’d be watching it. Santorum and Romney followed suit. And curiously enough, Ron Paul said that he’d be at home reading an economics textbook. Now, to me, it doesn’t seem like he’s ever read an economics text book. Or if he has, he’s managed to take all the completely wrong lessons from it. Now let me tell you why.


First of all, I think that Ron Paul should pick up an economic history book and learn about all the inherent problems the United States has suffered through because of the gold standard and the hard money policies he's currently advocating. Let’s begin the discussion with the Coinage Act of 1792. During the colonial period, Alexander Hamilton tried experimenting with bimetallism (gold and silver coins in circulation). The results were less than satisfactory. The fixed rates of gold and silver tended to deviate from the global market rates. As a result, at any given time, silver or gold could be undervalued or overvalued. If it happens to be gold that is undervalued, as what happened as a result of the Coinage Act, arbitrage occurs. People start exporting the gold out of the country and exchanging it in foreign countries. Then the process is repeated. Also, depending on the degree, relative prices in other countries could substantially be lower. As a result, the coinage would then be used to purchase those goods instead of their domestic counterparts. In accordance with Gresham’s Law, when these things begin to occur, only gold or silver would remain in national circulation at any given time.


To complicate matters further, the supply of precious metals, in general, also tends to be less than optimal for an array of reasons. Essentially, a nation’s precious metal supply isn’t a variable that remains relatively constant. Many factors, on a global scale, impact the quantity of precious metals. New gold or silver mines could drastically impact quantity in circulation. For instance, the 1849 gold rush effectively flooded the market with gold and drove down its value. Also, other markets besides the currency market demand gold as well. Jewelry makers for instance require gold and silver as a production input. As such, this will drive the precious metals out of the currency market and into the bullion market. And with today’s globally integrated banking system, this could happen with a click of a mouse button in the blink of an eye.


In general, monetary policy is more effective when the money supply and interest rates can be controlled. This is achieved, to a higher degree, with the ability to print money and conduct open market transactions. Furthermore, I’m not sure how the supply of gold or silver could keep up with increases in population over the long run. I would also think that with all the world markets impacting the supply and demand of precious metals that deflation would be the biggest threat. I imagine a scarcity of money would occur, which in many senses is worse than inflation. If inflation is expected to increase at a constant rate, the markets adjust accordingly. Deflation, on the other hand, causes markets to slow because consumers keep expecting prices to drop. As a result, they stop purchasing goods and services because they’ll be cheaper in the future. It’s a vicious cycle, and it’s one that the Federal Reserve has done a phenomenal job of controlling over the past 30 years (see Great Moderation).


Moreover, Ron Paul’s blatant disregard for economic history and monetary policy is also contrary to the famed intellectual conservative Milton Friedman. Friedman strongly advocated the use of fiat money because he knew fundamentally that it was easier to control. In his book, A Monetary History of the United States, Friedman also asserted that if the U.S. would have been off the gold standard, the Great Depression could have largely been averted.


With all this said, I won’t even bother regurgitating Ron Paul’s fiscal policy nightmares (I may save that for another day). A person who actually reads economic textbooks couldn’t possibly reach the conclusion that removing environmental regulations will produce efficient results. If he asked for proof, I’d tell him to study the American Industrial Revolution. If he wanted a current event, I’d tell him to study China’s contemporary manufacturing revolution…

Maybe I’ll write more on Ron Paul later. We’ll see.