In the new Congress, Ron Paul (R-Texas) will head the House committee that oversees the Federal Reserve. Thanks to the title of his book, we know he wants to end the Fed and paper money. But what will he replace it with? The short answer: metal-based currencies.

I recently participated in a hour-long radio debate on the Progressive Radio Network's Freedom News Hour with two Paul supporters who wanted to take me up on the challenge of being proven wrong in my disagreements with seven of Paul's points about the Fed. I really enjoyed this debate and learned some important things.

Of these, none is more significant than what my debate partners believe Paul would do if he could end the Fed. According to them, Paul isn't ready to go directly back to the gold standard. Instead, he wants to keep the dollar and add three more currencies. Those would be based on gold, silver and copper.

A Collapsed Standard of Living?

They believe Paul wants these four currencies to compete with each other in the marketplace, and hopefully, the metals-based currencies would ultimately replace the dollar. Paul acolytes seem to derive almost religious satisfaction from repeating the following phrase: "Austrian economics reveals that fiat currencies debase the dollar."

The argument goes that if we replace our so-called fiat paper currency with one based vaguely on metals, the U.S. will be able to eliminate the tax associated with paper currency, although it never seemed quite clear from the Paul disciples just what the magnitude of that fiat-currency tax is.

But they argued that America's standard of living has collapsed since 1960 because of this tax. I disagree. Thanks to the advent of a whole host of technologies, I pointed out that Americans' standard of living is much higher now than it was 50 years ago. We enjoy safer and more fuel-efficient vehicles, better TVs and home appliances, far better health care and a variety of wonderful computing and communications products that weren't even imagined back then.

Sure, things cost more now than they did then. But family incomes have mostly kept up with those higher prices.

Gasoline Bought With Gold

Also, the Fed that Paul hates so much has largely served its purpose since it was created in 1913. It helps smooth out some of the natural boom-and-bust cycles of capitalism by keeping price and production volatility down. According to economist Michael Bordo, between 1874 and 1913, price volatility averaged 17 but from 1946 to 1990, it fell to 0.8. The comparable figures for output volatility were 3.5 and 1.5. Moreover, the average unemployment rates were much lower post-Fed: 5% vs. 6.8% before it.

If we went to Paul's four currencies, the complications would be endless. If I wanted to pay for gasoline in dollars, but the only gas station available would accept only gold, I might run out of gas even though fuel was available.

This doesn't even take into account the complexity of people trying to figure out the exchange rates among the four currencies. Nor does it get over the difficulty of trying to buy anything electronically. As I understand the Paul system, nobody could borrow money in the three metal-based currencies unless more of that metal was deposited in a vault somewhere to make sure that the money was "sound."

From an entertainment perspective, it's a shame that Delaware's Christine "I am not a witch" O'Donnell will recede from the public eye this year. But I'm guessing that Paul will provide a pretty good spectacle as he uses his new platform to push for his unique ideas.

Increase your money and finance knowledge from home

Economics 101

Intro to economics. But fun.

View Course »

How Financial Planners go Grocery Shopping

Learn to shop smart and save.

View Course »