What If Ron Paul Really Killed the Fed?
The Kucinich legislation promises that abolishing private money creation "can be achieved with minimal disruption to current banking operations, regulation and supervision." The plan would create a Monetary Authority, through the Treasury Department, based on "a governing principal that the supply of money should not become inflationary or deflationary in and of itself." Its policy goals should be "maximum employment, stable prices and moderate long-term interest rates."
The following is a look at how abolishing the Federal Reserve might succeed, or fail in four areas:
InflationBest-case scenario: Inflation is among the most damaging impacts of Fed policy, Paul says. Since "more money equals less value" -- Paul also blames "steadily eroding purchasing power" on Fed inflationary policies and calls it "a real, if hidden, tax imposed on the American people" -- returning the rise and fall of prices to free-market forces, rather than artificial manipulation, is a cornerstone of his economic plan. The Fed should have only one mandate, in his view: price stability.
"There is only one possible solution to the inflation problem: Stop creating money out of thin air," he says in campaign literature. "But we're already in such a mess that the only way to have a real impact on the money supply is to increase interest rates so that people pay back their loans and borrow less money from the banks, which decreases the amount of money in circulation."
But since "higher interest rates might very well crash the economy," he says, "the Fed's current 'solution' to overcoming inflation is creating even more of it."
Worst-case scenario: Americans could face the flip side of inflation, rampant deflation. That, in turn, would decrease wages over time.
Paul and his supporters assert that things would even out and that wages and prices would be in concert with each other, causing no actual loss of buying power -- but the strength of the dollar would likely increase buying power. For American's stuck with debt on homes, cars and other big-ticket items, these commitments could become very difficult to pay down barring a complex revaluation process that would need to take place nationwide.
In the early stages of the transition, consumers may react to shrinking wages by pulling back on spending, even if their actual dollars are worth more.