Gary North

March 3, 2010

David Frum has written an article for CNN, "Ron Paul's money plan is far from golden." It is an attack on anything resembling a gold coin standard. It is therefore a defense of central banking in general and the Federal Reserve System in particular.

Who is David Frum? He is a Canadian immigrant who studied history at Yale and earned a law degree at the Harvard Law School. He has always earned a living as a journalist. He has long been employed by the neoconservative movement. He became a U.S. citizen in 2007.

In 2001, he got a job at the White House as a speech writer. It was Frum who coined at least part of the phrase, "axis of evil," which identified North Korea, Iraq, and Iran as the three most dangerous tyrannies of the decade. George W. Bush used the phrase in his State of the Union Address on January 29, 2002, his State of the Union Address after 9-11. That speech was part of his run-up for the Iraq War.

In his book, The Right Man: The Surprising Presidency of George W. Bush, Frum wrote that the head speech writer had given him the task of inserting a few words justifying a war on Iraq. He wrote "axis of hatred," but the head speech writer changed this to "axis of evil."

Frum's wife immediately sent out an email bragging about her husband's accomplishment, or at least two-thirds of the accomplishment: "axis of." This story got picked up by the Toronto Sun on February 1 -- not surprising, since her father was the editor.

The story spread. On February 27, Frum handed in his resignation. The rumor mill blamed Bush's anger at having had the most widely quoted phrase in his speech being attributed to a speech writer, as if anyone would have imagined otherwise, given Mr. Bush's skills of verbal communication. Frum later said that he had already given the White House a month's notice, meaning while he was still working on the speech. Whether he expected anyone to believe this story was a matter between him and his psychiatrist, which I assume he must have had, if he actually expected anyone to believe this story.

My point here is simple: Frum is a journalist who was briefly a speech writer for President Bush. For over two decades, he has bounced around inside the neoconservative movement. At present, he works for the American Enterprise Institute, which has a lot of money and has lots of Ph.D.- holding economists on the payroll. He has not written a book on economics, let alone monetary theory or policy. His books are on politics.

Then why did CNN, which is hardly a neoconservative media outlet, publish his hatchet piece on Ron Paul? Because he is one of its regular columnists.

Let's see: a conservative (it says here) who is a regular columnist for Ted Turner's creation. Isn't bipartisanship grand?

HATCHET JOB #1

Frum has been swinging his hatchet against Ron Paul ever since he worked for Rudy Giuliani's campaign for the presidency. According to Wikipedia, he became a U.S. citizen on September 11, 2007. He joined Giuliani's presidential campaign staff on October 11, as a senior foreign policy advisor.

On November 7, he wrote his first hatchet job on Ron Paul's economics.

His real motive was politics. He had a truly unique grasp of politics back in 2007 -- the product of Yale, Harvard Law School, and two decades of close observation of American politics. He began:

Yesterday, I posted an item casting doubts on the significance of Ron Paul's one-day $4 million fundraising haul. I suggested that his achievement is comparable to Ralph Nader's in 2000, and much less impressive than Howard Dean's in 2004. I went on to suggest that the main effect of Ron Paul's campaign, if continued to the end, would be to take votes from Hillary Clinton and thus help a Republican ticket headed by Rudy Giuliani.

Eleven weeks later, Giuliani dropped out of the race. He had entered seven primaries. The best he did was third place. He received no delegates. Ron Paul eventually received 35. He and his main supporter also gained a huge email list.

Frum did not have a clue regarding American politics, the Republican Party, or the utter hopelessness of Rudy Giuliani's dead-on-arrival campaign.

Frum's latest book is Comeback: Conservatism That Can Win Again. I find this amusing.

His understanding of economics was not as good in 2007 as his understanding of American politics.

The National Bureau of Economic Research is the arbiter of when American recessions begin and end. It has determined that the recession -- the worst since 1937 -- began in December 2007, three weeks after Frum wrote this:

As the dollar buys less abroad, Americans will be constrained to consume fewer foreign goods and services -- and foreigners will be induced to buy more from Americans.

With luck, this process will occur without a recession. The pace of domestic economic activity will continue brisk, dollar-denominated incomes will remain stable or even rise, unemployment may even decline as exports accelerate. This is what happened in 1985-86, the last time we saw a big drop in the value of the dollar.

Again, he did not have a clue regarding what was about to happen to the economy.

Of course, that's not the only way to balance accounts. There is another, the way Americans experienced in 1837, 1857, 1893, and 1930-33. In those years, the value of the dollar was fixed to gold. (One dollar = 1/20 of an ounce.) If something bad happened in the world or US economy, the dollar could not adjust. A recession was like a car accident without bumpers or crumple zones -- the full pain was conveyed uncushioned to the riders in the cabin. Domestic asset values collapsed. Unemployment jumped overnight to 15% or 20%. Homes were lost, businesses disappeared.

But wait! This is what has happened in the years since Frum wrote his article. It began three weeks after he wrote it.

In 1896, ironically, the gold standard got lucky. Bryan lost, McKinley won. Almost immediately after McKinley's elections, gold miners first in South Africa and then in Australia found huge new goldfields. America got the inflation it needed without silver, thanks to a geological accident. From 1896 to 1913, the world economy expanded in what is known to history as "La Belle Epoque."

In fact, the gold standard period 1879 to 1896 was one of remarkable economic growth -- the greatest in American history. This is made clear in the book by Milton Friedman and Anna J. Schwartz, A Monetary History of the United States. Wages fell slightly, prices fell steadily at a more rapid rate than wages, and output quadrupled. Per capita income doubled.

As for Ron Paul, Frum dismissed him as a Michael Moore type.

Of course I am saddened to discover that many thousands of Americans have rallied to a candidate campaigning on a Michael Moore view of the world.

Saddened, but not greatly surprised. There is a constituency for anything in a country this big.

In short, David Frum did not have a clue.

Has he learned anything since 2007? This brings me to his recent hatchet job.

HATCHET JOB #2

Frum began by noting Paul's overwhelming victory at CPAC: the Conservative Political Action Conference. Paul got 31% of the straw votes for President. Mitt Romney, who had won for three years in a row, got 22%. From the point of view of a neocon, this was bad news indeed.

CPAC's organizers cautioned against over-interpreting the Paul win. Participation in the poll had been light, the Paul team had just out-organized, etc. All true enough.

Ron Paul had once again caught Beltway conservatives by surprise. All they could do was spin their way around this. With the Web, this no longer works.

Ron Paul is most famous for his bill to audit the Federal Reserve. Frum was too savvy to mention this. That would identify him as an apologist for the FED, which is exactly what he is. So, he went after Paul's view of gold as money. This, all good Beltway conservatives know, is safe.

Or was.

So let's rediscover why it was that Americans abandoned the gold standard in the first place.

In 1929, the U.S. economy slumped into recession. Under the weight of a series of terrible decisions, that recession collapsed into the worldwide Great Depression.

Americans abandoned the gold standard because Franklin Roosevelt, on his own authority, announced that any American or resident in America who did not turn in his gold would be prosecuted. If David Frum is not aware of this, then he spent way too much money and way too much time getting a masters degree in history at Yale.

But why did decision-makers make so many bad decisions? The short answer is that they were trapped. Almost all of the right decisions would have ballooned the U.S. federal budget deficit.

Let's see. Which economist became famous for arguing this way? Was it F. A. Hayek? No. Was it Milton Friedman? No. Was it. . . ? We all know who it was: John Maynard Keynes. Except for one thing: in 1929, that was not Keynes' position. It became his position only in 1935, when the whole world was off the gold standard, inflating like mad, and running massive deficits. He published in 1936.

Between 1929 and 1932, the U.S. money supply collapsed, as banks failed and bank deposits and commercial credit vanished. In their classic Monetary History of the United States (1966), Milton Friedman and Anna Schwartz identified this contraction of the money supply as the proximate cause of the Great Depression. Why didn't the Federal Reserve act to prevent the contraction? Again: the gold standard.

David, David, David: at least fake your knowledge of the relevant literature correctly, will you? The book was published in 1963.

Second, why didn't the FED act to prevent the contraction? It did not deflate. It just sat. No, it did not buy toxic assets owned by the banks -- assets that were about to fall in value. No economist believed a central bank should do this. That was Ben Bernanke's historic innovation in 2008 -- unique in Federal Reserve history.

The FED did not stay paralyzed. This is known to anyone who has studied FED policy. It expanded the monetary base from late 1931 through 1933. This is clear from a chart published by the Vice President of the Federal Reserve Bank of St. Louis.

From 1930-1933, 9,000 banks failed, taking deposits with them. There was a run on the banks. The money supply contracted. This was not the FED's fault.

The government set up the FDIC in 1934. That ended the bank runs. It also ended the deflation. But the FED had not possessed such authority in 1929-33.

What caused 1929? That, Frum does not bother to ask. Anti-gold economists and their faithful journalists never do. The world went off the gold standard in 1914 when World War I broke out. The commercial banks stole their depositors' gold. Then the central banks stole the commercial banks' gold. They never gave it back. Then they inflated.

The inflation of the late 1920's created the boom. The boom ended in 1929. But the anti-gild crew always begin their discussion with 1929. They do not refer to Murray Rothbard's book, America's Great Depression, also published in 1963. He showed how the depression was caused by the central bank's inflation before 1929. Paul Johnson alone used Rothbard's book to write the section on America's depression in his conservative masterpiece, Modern Times (1983). Frum does not mention this, either.

Imagine now if the gold standard were in operation today. The federal government would be scrambling to balance its budget in the midst of recession, cutting spending and raising taxes. Instead of pumping money into the economy, the Federal Reserve would be sucking money out. Priority 1 would not be creating and saving jobs, but preserving the nation's gold hoard.

Imagine, rather, that the Federal Reserve did not exist to bail out large banks, along with Henry Paulson's unilaterally nationalized mortgage market, with $1.5 trillion in fiat money, plus T-bill swaps at face value in exchange for toxic assets held by big banks.

Better yet, imagine that the government owned no gold. Imagine that the average Joe and Jane possessed gold coins, or IOU's to gold issued by banks and warehouses. There would be no inflation. There would be no FED to plan the economy by committee. There would be no -- dare I say it? -- central economic planning in monetary affairs.

This is not the CNN line. This is not the neoconservative line. This is the F. A. Hayek line. And, truth be told, it is the Milton Friedman line. As Austrian School economist Richard Ebeling points out,

Why wouldn't a market-based gold standard be feasible or desirable under present circumstances? Friedman explained his reasoning in an April 1976 lecture entitled "Has Gold Lost Its Monetary Role?" that was delivered in Johannesburg, South Africa. Simply put, governments are no longer willing to be restrained by a gold standard. They want control over money for various macroeconomic manipulative purposes. However, Friedman said that

"if you could re-establish a world in which government's budget accounted for 10 percent of the national income, in which laissez-faire reigned, in which governments did not interfere with economic activities and in which full employment policies had been relegated to the dustbin, in such a world you might be able to restore a real gold standard. A real honest-to-God gold standard is not feasible because there is essentially no government in the world that is willing to surrender control over its domestic monetary policy."

Sadly, the Ph.D. economists at the American Enterprise Institute are seemingly unaware of Friedman's rejection of his 1963 position. If they don't know, why should David Frum know? Or care?

What does Frum know? This: Franklin Roosevelt saved the economy when he took America off the gold standard. That was the turning point.

Back in the 1930s, governments accepted horrific suffering because they were terrified of the consequences of going off gold. When President Franklin Roosevelt told his budget director, Lewis Douglas, of his decision to quit gold, Douglas replied: "This is the end of Western civilization." He wasn't kidding either.

In fact, the decision was the turning point of the Depression, the beginning of recovery. And every monetary economist knows it. Which means that the first thing any future gold-standard government would do in the event of recession would be to jettison gold. And every market trader knows that too.

This is Frum's message: government coercion and theft work. Make it illegal for citizens to own gold. Confiscate their gold coins at $20 an ounce, and, once the government has the stolen goods, raise the price to $35, which is what Roosevelt did in 1934. Let the government pocket 75% on the transaction (15/20 = .75). In short, take away from the public the right to control the money supply and stop inflation. Hand this authority over to the central bank.

Don't blame government-licensed fractional reserve banking for economic depressions. Blame the public, who use gold and silver coins to hold bankers in check. Adopt as your reigning monetary principle these slogans: "Power from the people! Power to the central bank!"

This is neoconservatism. This is economic liberty, neocon style. This is the government's gun in your belly: "Hand over your gold. It's for your own good."

Frum is upset that Ron Paul has persuaded so many conservatives that neoconservative economics is Keynesianism in drag.

This is an argument against a government-imposed, government-guaranteed gold standard. It is an argument for the system that Ludwig von Mises called for in 1912: free banking. Get government out of the money business.

That would shrink the state. That is the nightmare scenario for big-government conservatives like Frum.

The punch line to one of my favorite anecdotes goes, "Son, your answers are so old, I have forgotten the questions." Has the Depression receded so far into history that the answers that once plunged the nation into misery can possibly look credible again?

Son, your answers are so old -- and so much the product of Franklin Roosevelt's hagiographers -- that you have forgotten the question. Here is the question: "Why should anyone trust the government or a central bank to protect the value of the currency?

Using the inflation calculator (it's not called the deflation calculator) of the Bureau of Labor Statistics, we can see what the Federal Reserve System has done to the dollar. Beginning in 1914, it has eroded 95% of its value.

CONCLUSION

Let me review. In 2007, Frum wrote this:

My correspondents were most irked by my sardonic suggestion that Ron Paul could enhance his electoral appeal by concentrating his blame-America foreign policy (for which as Michael Moore showed, there exists an unfortunately substantial constituency) and dropping his crank monetary views.

Sardonic, indeed. "Sardonic, adjective: characterized by bitter or scornful derision; mocking; cynical; sneering." He knew exactly what he was doing.

David Frum is a hatchet man. If he were to spend the rest of his life in rigorous journalistic training, he might make it to hack status. Maybe.

Note: you have just read a hatchet job. I am very good at this art form. Here are the steps for writing an effective hatchet job:

1. Find a target who is superficially informed about his subject, but who in fact is ignorant.

2. Ideally, your target will have publicly attacked someone with more knowledge in this area than he himself possesses.

3. Even better, show a long-term pattern of ignorance in multiple fields in which he lays claim as an expert.

4. If he has published in an Establishment liberal forum, so much the better: guilt by association (his and theirs).

5. Leave the reader with the impression that your target is a self-assured blowhard.

6. Let him reply to you, which forces him to deal with the terms of debate that you have established.

7. Repeat the exercise if he is silly enough to reply.

It takes one to know one. The difference is, I know what I'm talking about. David Frum doesn't.

More to the point, Ron Paul knows what he is talking about. David Frum is a Harvard-educated lawyer who lacked the skills of persuasion suitable for a lawyer. He chose instead to become a paid hatchet man. He is not very good at it, but at least it's a living. It pays more than the Toronto Sun.

When you think "David Frum," think "political advisor to Rudy Giuliani." That is really all you need to know.

If you are still not convinced that Frum is both ill-informed and a hatchet man, see what Austrian School economists Walter Block and William Barnett II did to Frum after Frum's first hatchet job on Ron Paul.

But Frum just couldn't stay away. He had to do it again. So, I got my turn. It is not all that often that someone as clearly a statist inflationist wolf in conservative clothing as Frum is presents himself for a second go-round. I am thankful for small favors.

So much education. So few rhetorical skills.