Ron Paul and the Martian Atmosphere Machine
“Bernanke, give these people air!”
by John DeFeo
Ron Paul has staked his presidential hopes on a few key issues, among the most prominent being monetary policy.
The feisty Texas congressman has had his share of ideological head-butting with Federal ReserveChairman Ben Bernanke, but if these encounters have generated a few amusing sound bites, they have failed to generate any meaningful economic debate.
This is unfortunate.
Whereas Congressman Paul’s economic views are often condensed to a single concept: gold standard — the question that is not being discussed is whether or not an inflationary or deflationary economic system is better for society as a whole.
Of course, these concepts have a relationship: an economy based on a fixed money supply will likely suffer a secular decrease in prices (deflation); an economy based on an ever-increasing money supply will likely experience rising prices (inflation).
The U.S. has pursued the latter (inflationary) course while a deflationary monetary policy — regarded by most as a not-to-be-named evil — has been relegated to the dustbin of history (perhaps, most famously villainized by Bernanke in a 2002 speech: Deflation — making sure “it” doesn’t happen here).
But if deflation is a scary machination of the past, there remains a sect of believers who see it as a path to salvation — and this invites an interesting pop cultureparallel: Total Recall.
In the film, a wealthy industrialist controls the air supply on the planet Mars; he attempts to quash a rebel movement to activate an ancient “atmosphere machine” that would make free air available to the entire planet. Obviously, the industrialist has a financial interest in suppressing the rebel movement, but in the end, it’s revealed that the air-monopolist truly believes that the machine will destroy the world.
It can be argued that bankers hold the greatest financial interest in an inflationary monetary system — bankers are in fact the “money creators” of the country (a point made by the Federal Reserve itself) and as such, enjoy obvious privileges. However, as the U.S. drifts further away from the Great Depression (a deflationary period when demand, spending and economic activity collapsed), the concept of “falling prices” becomes more antiquated and scary.
But if our monetary system creates a conflict of interest for bankers, politicians and economists, their fears of deflation seem genuine (largely). However, this economic absolutism tends to gloss over the historical failures of inflationary systems (notably, Germany and Hungary), and likewise, pays little mind to the fact that falling prices (and personal savings) haven’t always been ruinous. Decades ago, even the most vocal critics of deflation kept an open mind.
In discussing the post-war years preceding the Federal Reserve System, Milton Friedman and Anna Jacobson — in their book A Monetary History of the United States, 1867-1960 — resolved that:
For a period prior to the Federal Reserve System, the United States used competingcurrencies — gold and greenbacks — to great effect. Though the country experienced deflation (falling prices), it also achieved rapid economic growth — a coincidence that “casts serious doubts on the validity of the now widely held view that secular price deflation and rapid economic growth are incompatible.”
image: flickr.com/ario
