Tuesday, June 4, 2013

US Congressman Ron Paul on Inflation

After sharing my summaries of Parts 1 and 2 of Pillars of Prosperity, I decided to skip Parts 3 and 4 to directly deal with Part 5, which I think is the heart of the book and most relevant for our time. In Part 5, Dr. Paul discussed Money and Banking: Gold versus Fiat. I intend also to forego the remaining Parts of the book and thinking of studying the next book, The Case for Gold from my list of priority reading. However, I am still unsure about the direction of my mind. It still depends on my interest.
In studying Part 5, instead of following the usual order of topics as presented in the book, I am thinking of rearranging the topics on the basis of repeated subjects. I find at least 9 interesting subjects. They include inflation, the value of US dollar, gold standard, Federal Reserve, monetary policy, fiat money, economy, honest money, and tyranny.
To provide the bird’s eye view of the location of Part 5 in the overall content of the book, allow me to share the 9 main parts of the book. Part 1 is about The Economics of a Free Society. Part 2 talks about Mises and Austrian Economics. We are finished with these two Parts. Part 3 deals with Reforming Social Security. Personally, I lack interest to read this part. I assume that most of its contents are directly applicable to American context. Part 4 is a pleasurable reading for me. It is about Giving Money Back to the Taxpayers. I just wish in my heart that we have a Filipino politician who has the knowledge and the courage to pass similar bills in the Philippine Congress. Part 6 is about Free Trade: Real versus Phony. This could be another interesting study for me after Part 5. Part 7 is about International Affairs. Part 8 deals with the role of the government in housing market and Part 9 ends with Spending, Taxes, and Regulations.
I want to start with inflation. And there are 6 relevant speeches dealing with this specific subject.
Inflation
First and Second Speeches
In his first speech dated February 15, 1979, Dr. Paul described inflation as a “destructive process” that the members of the US Congress were not able to stop due to erroneous understanding of the term.
In October 17, 1979, the Congressman contradicted the popular opinion about the US dollar getting stronger. He argued on the contrary that the US dollar was actually getting weaker due to inflation.
Third and Fourth Speeches
After a month in November 16, Dr. Paul delivered two speeches at the US Congress about inflation. In his first speech, he followed up his previous argument that the erroneous concept about inflation resulted to inability to provide genuine monetary solution. He further argued that high interest rates and prices are actually results of inflation (increase in money supply) rather than the other way around.
His second speech provided a more elaborated exposition of economic issues surrounding inflation. His central argument is that only the government has the capability to create inflation. His points exposed the error of misleading the public as to the causes of inflation, explained the true nature of inflation and how does the government do it, proved that inflation is not a modern economic phenomenon, dismantled the false solution, and provided the genuine solution to inflation.
If people would just understand the dynamics of inflation as explained by the Congressman we would be more economically informed and more empowered to speak against the misdeeds of the government. And there is no better way to start this unlearning and relearning process than by identifying the real cause of inflation. According to the Austrian Congressman, shifting the blames to labor unions, businessmen, Arabs, and the consumers are inaccurate and misleading. It does not help in solving the problem.
The Cause of Inflation
Only the government is responsible for causing inflation by increasing the supply of money through the central bank and by monetizing debt. High prices are not the cause of inflation, but a result. Continuous increase of prices of both production and consumption goods is not the mistake of free market, but actually an act of the government. If free market really exists, falling prices is the natural result.
I find the explanation of Dr. Paul on the misleading causes of inflation very informative. I am tempted to quote in full his explanation on the subject for there is no better way to fully understand the subject than to read the very words of the author himself. Despite of the limitation of my words, I will try to restate as briefly as possible the Congressman’s explanation.
Blaming greedy businessmen as the cause of inflation is misleading for human nature remains basically the same today as in the past. If greed is the real reason, why the prices are not rising up to nth level? It is basically because of consumer sovereignty that businessmen who will do that will be punished by the market by putting them out of business.
Blaming labor union as the cause of inflation will also not stand. We were told that demand for higher salary result to increase in prices causing inflation. The truth is: salary increase demanded by labor union is far below in comparison to the rate of increase in money supply. Loss of the purchasing power of workers’ salary is the final outcome of such growth in money supply.
Blaming the Arabs for inflation is also misleading. It is public knowledge that the price of oil is constantly increasing. The Arabs want their oil to be paid in higher quantity of US dollars. Ron Paul’s comparison of America’s need of oil with that of Switzerland, West Germany, and Japan is enlightening. These three countries import all their oil while US only import about half of it. The question is: why despite of such great discrepancy in the need for oil importation the standard of living of US is much lower than the three countries? Ron Paul’s answer lies in the difference of inflation rate between the two cases.
The True Nature of Inflation
For Ron Paul, inflation is both a tax and a theft. As a tax it is “exceedingly unfair and regressive” (p. 110). Many suffer from it, but few benefits from it. The sufferers are the laborers and savers. Those who benefit are “speculators, bureaucrats, and the special interests favored by the government” (ibid.).
Inflation too is a theft. It is a form of robbing the workers and savers of their hard-earned money. “Morally, inflation is not different from the private counterfeiter…fraudulently exchanging something worthless for something valuable” (p. 111).
Other social and economic consequences of inflation include generating mistrust, rising prices, bankruptcies, and increasing unemployment. The illusory short-term economic benefits of inflation are too cheap a price to pay for all the economic destructions it causes. People will be dissatisfied, irritable, and uncertain about their future. Instead of planning for their future and participating in a free economy, people not knowing that their economic freedom is taken away from them by means of inflation will just go with the flow in living a daily survival mode of life.
Inflation is not a Modern Phenomenon
Inflation is not a modern economic phenomenon. Ron Paul claimed that inflation existed as early as the Roman Empire. Other monetary historians would even go earlier than that period. In American history, the libertarian Congressman mentioned that inflation played a critical role both in the Revolutionary War and the Civil War.
Solution to Inflation
The conventional solution of price and wage control has been tried and proven a failure “for more than 4,000 years” (p. 112) for it only deals with the symptom and not the primary cause of inflation. The only solution to inflation is to stop printing paper money and return to sound money.
Fifth and Last Speeches
The fifth speech of the Congressman was delivered on December 12, 1979. Its title is Debasement. In the mind of Ron Paul, inflation is currency debasement. In turn, debasement is a process of destroying the US dollar and threatens personal liberty. Those who are responsible for debasing the US dollar are not the businessmen, labor union members, Arabs, and the consumers, but the US Congress, the Executive, and the Federal Reserve.
The final speech on inflation was given on March 6, 1980. In this speech, Dr. Paul clearly defines inflation as “the expansion of the supply of money and credit” (p. 115) and specifically identifies the US Congress as “guilty of this crime” (ibid.). As a result of this crime “hundreds of billions of dollars” have been stolen “from orphans and widows, from the aged and the poor, from the thrifty and hard working” (ibid.). The Congressman was calling for a “thorough cleaning” of the US Congress as taking the chance to prevent an economic disaster.
Conclusion
Personally, I find the six speeches very educational on this confusing subject of inflation. Dr. Paul’s speeches help me clarify the confusion in my mind. How I wish that increasing number of people will take time to attentively listen to the message of the Congressman. The future of freedom depends on this enlightenment.
Source: Paul, Ron. (2008). Pillars of Prosperity: Free Markets, Honest Money, Private Property. Auburn, Alabama: Ludwig von Mises Institute.