Why is Rep. Ron Paul so critical of the Federal Reserve Board and so sold on gold?

Because he thinks the U.S. monetary system is being mismanaged? Obviously.

Because he has invested hundreds of thousands of dollars in gold stocks. Obviously.

Should a Washington Post report that Paul has been preaching his book and encouraging speculators to buy gold make his Colorado friends like Republican Senate candidate, Ken Buck, suspicious of Paul’s economic proclamations? Obviously.

The lede graphs from WaPo:

Rep. Ron Paul is captivated by gold. Over the past two decades, he has written books about the virtues of gold-backed currency. He has made uncounted speeches about the precious metal. He even took a leadership post on the House subcommittee that oversees the nation’s monetary policy, mints and gold medals.

In recent years, Paul (R-Tex.) has poured hundreds of thousands of his own dollars into stocks of some of the world’s largest gold-mining operations, according to a review of his financial disclosure forms by The Washington Post. In 2008, while advocating for the United States to reinstate a gold standard, he reported owning up to $1.5 million in shares of at least nine gold-production companies. In addition, he disclosed up to $200,000 in silver stocks. In all, those holdings represented close to half of his assets.

Paul is an aggressive and passionate critic of the Fed, and he is a leader in the Congressional drive to politicize the Fed.

The lede editorial in today’s Wall Street Journal deplores the politicization of the Fed.

And a couple of excellent letters to the editor do an excellent job of explaining why a return to a gold standard for the dollar makes no sense. Steve Conover is exactly correct:

Rick Dickson’s June 8 Letter “Let’s Move Away From Fiat Money” exemplifies the widespread misconception that replacing fiat money with a gold standard would stabilize the value of money and restore confidence in the dollar. That misperception leads to the dangerous conclusion that we would no longer need the Federal Reserve Board of Governors managing the money supply.

In fact, the only true foundation for a stable currency is a strong economy, for which money merely provides lubrication. If money-supply growth is synchronized with the real economy’s needs, the virtuous result is the stable currency that Adam Smith told us is one of the responsibilities of government. Too much or too little money results in unacceptable inflation or deflation—both of which have a lengthy world-wide track record of causing not just economic turmoil, but also political problems, up to and including the overthrow of governments.

I reject the idea of a gold-backed dollar for two reasons. First, the gold supply cannot be controlled as readily as the gold bugs like to imagine. For example, picture what would happen to the so-called intrinsic value of gold in the wake of a technology breakthrough enabling inexpensive extraction of gold from seawater. The result would be hyperinflation, because nobody would put gold back into the ground or dump it back into the sea in order to keep the money supply from skyrocketing. Poof—so much for the “intrinsic” value of gold.

Second, the amount of control we humans do have over the gold supply rests primarily in foreign hands. Expecting the Russians, South Africans and Indonesians to modulate the gold supply as necessary to support a stable U.S. dollar is about as naive as it gets.

Ken Buck needs to read the editorial and the letters to the editor and rethink his positions on the Fed. He’s in the camp that thinks the Fed needs another audit, which is another movement designed to put incompetent politicians in charge of our monetary policy.

Disclosure: I own a gold stock.

LINKs:

Lawmakers committee assignments and industry investments overlap. By Robert O’Harrow Jr. and Dan Keating.

Politicizing the Fed; Congress seeks more control over the 12 regional banks. WSJ editorial. 

Good as gold may not be good enough for money. Letter to WSJ by Steve Conover.

If the wsj.com links above required paid subscriptions, go to the Journal’s http://www.opinionjournal.com page for May 14, 2010.