In the latest issue of National Review, Ramesh Ponnuru “deconstructs” Ron Paul in order to foster NGDP level targeting:
“People who see through Paul’s illogic, misapprehensions, and paranoia typically dismiss everything he has to say about money. But buried beneath all of that are some reasonable points. The Fed doesn’t have a great track record, and keeping it in its present form may not serve us well. In a recent study for the Cato Institute, three academic specialists in monetary policy noted that the Fed, in its first decades, generated a severe inflation and a severe depression; that it does not seem to have stabilized the economy; and that it has extinguished the kind of benign, productivity-driven deflation that the country sometimes experienced before the Fed’s creation.
The purpose of money, as Paul rightly describes it, is to facilitate exchange and thus the coordination of economic plans. A governmental institution with discretionary control over the money supply — which is a good working definition of a central bank — undermines that goal because no clear rule constrains it, forces it to behave predictably, and thus enables economic actors to make and coordinate their plans against a background of monetary stability. Central banking is not central planning, but it does reflect an unwarranted confidence in the ability of government officials to engineer beneficial economic outcomes.
Replacing discretion with a sound rule would thus be a major step forward. One possible rule would force the Federal Reserve to freeze the money supply, as Paul recommends. But this rule would require prices and output to fall any time people increased their demand for money balances. Another rule would instruct the Fed to keep the price level constant from year to year. But under that rule the Fed would have to compound the blow from any negative supply shock (a disruption of the oil market, for example) by reducing the money supply. A sudden move to that rule could also cause serious economic dislocation if people were used to a higher inflation rate and had, for example, factored it into long-term debt contracts.
Considerations such as these have led some monetary economists to favor a rule that would commit the monetary authorities to stabilizing the growth of spending. Inflation would be allowed to go up or down in response to productivity shocks and the money supply would be allowed to go up or down in response to changes in the demand for money balances. Theorists of free banking have generally agreed that if banks were allowed to issue currencies in competition with one another, something like this rule would emerge as market equilibrium. So a government pursuing this policy would in a sense be mimicking a free-market outcome (although the choice of growth rate and starting point would admittedly have an element of arbitrariness). Scott Sumner, a professor of economics at Bentley University, has made an ingenious proposal to use futures markets to estimate the future course of nominal spending, further reducing the discretion and improving the accuracy of the monetary authority.
We have already had something of a test of this policy. Between 1982 and 2007, the Fed’s conduct of monetary policy led to a fairly consistent 5 percent annual increase in nominal spending even though it was not legally bound to produce one. This period was not the nightmare that Paul portrays but a time of relatively stable growth and low inflation. (Over the last twelve years of the period, inflation averaged 2.6 percent.) In the closing years of the period the Fed allowed nominal-spending growth to rise a bit above the trendline, which may have expanded some asset bubbles. The Fed could have corrected for this excess and then gradually reduced the growth rate of nominal spending to eliminate all long-term inflation.
Instead, starting in mid-2008, it allowed nominal spending to drop at the fastest rate since the depression within a depression of 1937–38. It even discouraged the circulation of money by paying banks interest on their reserves. The consequences of these decisions have been many and horrible. Among them are booming book sales and credibility for a congressman who does not deserve them.”
 My note: What the Fed can “freeze” is not the Money Supply, but the Monetary Base. In doing so, the multiplier would change to ensure monetary equilibrium (equality between Money Supply and Money Demand). This would come close to mimicking “free banking”.