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Ron Paul and the Martian Atmosphere Machine

NEW YORK ( TheStreet) -- Ron Paul has staked his presidential hopes on a few key issues, among the most prominent being monetary policy.

The feisty Texas congressman has had his share of ideological head-butting with Federal Reserve Chairman Ben Bernanke, but if these encounters have generated a few amusing sound bites, they have failed to generate any meaningful economic debate.

This is unfortunate.

Whereas Congressman Paul's economic views are often condensed to a single concept: gold standard -- the question that is not being discussed is whether or not an inflationary or deflationary economic system is better for society as a whole.

Of course, these concepts have a relationship: an economy based on a fixed money supply will likely suffer a secular decrease in prices (deflation); an economy based on an ever-increasing money supply will likely experience rising prices (inflation).

The U.S. has pursued the latter (inflationary) course while a deflationary monetary policy -- regarded by most as a not-to-be-named evil -- has been relegated to the dustbin of history (perhaps, most famously villainized by Bernanke in a 2002 speech: Deflation -- making sure "it" doesn't happen here).

But if deflation is a scary machination of the past, there remains a sect of believers who see it as a path to salvation -- and this invites an interesting pop culture parallel: Total Recall.

In the film, a wealthy industrialist controls the air supply on the planet Mars; he attempts to quash a rebel movement to activate an ancient "atmosphere machine" that would make free air available to the entire planet. Obviously, the industrialist has a financial interest in suppressing the rebel movement, but in the end, it's revealed that the air-monopolist truly believes that the machine will destroy the world.

It can be argued that bankers hold the greatest financial interest in an inflationary monetary system -- bankers are in fact the "money creators" of the country (a point made by the Federal Reserve itself) and as such, enjoy obvious privileges. However, as the U.S. drifts further away from the Great Depression (a deflationary period when demand, spending and economic activity collapsed), the concept of "falling prices" becomes more antiquated and scary.

But if our monetary system creates a conflict of interest for bankers, politicians and economists, their fears of deflation seem genuine (largely). However, this economic absolutism tends to gloss over the historical failures of inflationary systems (notably, Germany and Hungary), and likewise, pays little mind to the fact that falling prices (and personal savings) haven't always been ruinous. Decades ago, even the most vocal critics of deflation kept an open mind.

In discussing the post-war years preceding the Federal Reserve System, Milton Friedman and Anna Jacobson -- in their book A Monetary History of the United States, 1867-1960 -- resolved that:

For a period prior to the Federal Reserve System, the United States used competing currencies -- gold and greenbacks -- to great effect. Though the country experienced deflation (falling prices), it also achieved rapid economic growth -- a coincidence that "casts serious doubts on the validity of the now widely held view that secular price deflation and rapid economic growth are incompatible."

Economics is a "dismal science" in that everything is a variable -- nothing a constant. As such, Friedman and Jacobson's observation may be completely irrelevant in our modern economy. But we should not be so dismissive of ideas that sound crazy, if only because they are different.

Perhaps competing currencies and falling prices would end in disaster (author's note: I am not an advocate of the gold standard), but there is something that seems fundamentally correct in the reasoning that: If the amount of time, effort and resources necessary to create something decreases, prices should follow downward (or, at least remain constant).

And as everyone who has stood in line for an iPad or iPhone knows, a cheaper version of the product is on the way -- but this has not affected present demand (seemingly refuting the idea that falling prices will cause consumers to indefinitely postpone discretionary purchases).

Benjamin Graham -- one of history's great financial thinkers -- once offered a monetary middle ground: supporting government intervention during economic crises and proposing a monetary policy dictated by a composite of usable commodities (alas, this policy failed to generate discussion at the 1944 Bretton Woods Conference).

Today, Ron Paul remains one of the few politicians who encourages the public to take a hard look at money and think differently. But in economics and Washington politics, the oft-ignored congressman might as well be known as the " fool on The Hill."

-- Written by John DeFeo in New York City



Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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