Ron Paul's idea of auditing the Fed is not nonsense, idiotic or any of the other ad hominems thrown against the position. The constitution gives congress the power to create and manage the currency. They have wisely (after 130+ years of muddling) created a semi-autonomous central bank we call the Fed. We rationally want this agency to be sufficiently independent of politics so that various Senators don't directly influence the Fed. On the other hand we also want Congress to collectively be appraised of the Feds practices and to control the agency LT policies, but not the short term operational tactics.
Article I Section 8 of the US Constitution states clearly that Congress shall have the power
To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;
To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;
The meaning of "coin" is unambiguous, and it does not authorize the Congress to delegate the counterfeiting of our money to unaccountable bankers, which is exactly what has happened at the Federal Reserve.
Furthermore, Article I Section 10 states that
No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.
Clearly the spirit of this section which enumerates powers prohibited by states applies to the Federal Reserve System, because it was inconceivable at the time that the Federal Government would be in charge of issuing fiat money. The spirit is that anything but gold and silver money is anathema, and not that the Federal Government should have the exclusive right to delegate the debasement of our money.
The creation of the Fed wasn't wise, it was a disaster. The Fed caused and presided over the Great Depression by contracting the money supply by roughly 30% at the worst possible time. It's caused and presided over multiple recessions, including the current one (despite Ben Bernanke's recent protests that it was a lack of regulation). Finally, it has presided over the destruction and debasement of the US dollar.
The central bank is the cause of the inflation tax, which is merely a regressive flat levy on monetary wealth. Assuming for a moment that the Fed actually was constitutional, why would the Congress, who represent the people of the United States, delegate the power to levy such a massive tax to an independent group of bankers? The argument for Federal Reserve independence is totally ridiculous, and without merit. The control of our money is of crucial importance. Assuming that we're going to continue to disregard what the Constitution says, why shouldn't our elected politicians have control over the money supply? They legislate the rates of every other tax, and are presumably held accountable at the voting booth. The creation of money is not a neutral transaction, and it's folly to assume that "independent" bankers will do it impartially.
Lets follow the Constitution. If not, lets place the administration of what is in effect the biggest tax in the hands of elected politicians, and hold them accountable. The status quo is unacceptable.
Tho' Gold and silver are in insufficient supply for even the pre-1933 25% reserve rate, but there are lots of other proxies available - not a problem. Milton Friedman's "Money Mischief" book shows how historically the supplies for gold and silver, sometimes due to mine discovery or new recovery methods, rather than Central Bank policy was the control for money supply, and to the extent this did not correspond with GDP changes inflation & deflation resulted. So I would dub specie backed currency as practical and implementable but not a solution to inflation/deflation cycles caused by lack of money supply control.
The idea that the supply of gold is relevant to its function as money, is another specious argument. There is plenty of gold to serve its Constitutional function, and gold will simply be revalued to reflect past debasement.
The alternative to a backed currency is fiat currency and a Central Bank model. In that case instead of money supply being dictated by mining efforts it is dictated by Fed policy capable of being influenced in all sorts of corrupting ways. It is in the governments interest (and that of any net borrower who has a non-inflation termed repayment agreement) to inflate the currency. This is Ron Paul's legitimate concern. I agree with that concern, but return to a backed currency is not a good solution. It takes money supply management away from the Fed and gives it to mining interests or to others who may diddle the market (remember Bunky Hunt cornering silver circa 1980 ?)
From my perspective, there is no difference between Nelson Hunt, and Ben Bernanke. Neither are operating in my interest.
I think fiat currency has too many advantages to avoid, but the major shortcoming is the general tendency to manufacture inflation to the advantage of the currency controllers.
So I would call Paul's approach, to the extent I understand it, wrong-headed, and ineffective. It's a poor approach to a real problem. But it is considerably less looney and out-of-touch with reality than say claiming that increasing access to medical services will decrease total costs, or making claims about unmeasurable and wildly exaggerated "jobs saved" figures. Or the "too big to fail" malarky.
The real problem is the existence of the unconstitutional Federal Reserve itself.
