I didn't understand Ron Paul last year during the primaries. The Federal Reserve Bank, fractional reserve lending, and the gold standard were all Greek to me. However, one Great Depression-like financial crisis later, I am now completely in agreement with Ron Paul. These issues took a lot of time for me to understand and will be challenging for me to explain, but here goes.
This post will focus primarily on the harm done by the Federal Reserve Bank. The Federal Reserve Bank (FED) is a privately owned, publicly/privately administered central bank with the power to print money. This bank distorts economic decision-making and misleads entrepreneurs into making unsound investments by manipulating the price of money. Interest rates are the price of money. In a capitalist market system, supply and demand would determine interest rates. For example, a relatively large number of "savers" in the economy with relatively few "borrowers" would cause relatively low interest rates, and vice versa. However, the Federal Reserve Bank price-fixes the value of money by controlling interest rates.
You may ask, why does the FED price-fix the value of money? This has to do with inflation targeting. The FED admits that they want to create 2-4% yearly inflation. Inflation occurs when the total number of dollars in the economy grows at a pace faster than GDP (the total amount of goods and services produced per year). Low interest rates entice people to borrow from the banks. Borrowing from banks, due to fractional reserve lending, increases the total money supply/total number of dollars in the economy. This happens because banks can lend out money they don't have, or have for only a very short term.
A bank can take a five-day checking deposit and loan it out for thirty years. Banks only have to keep a very small amount of their total loans in reserve, on demand for depositors. They create money out of thin air, money which is loaned out, gets deposited into another bank, and is then loaned out again, repeating the process. The more money borrowed from banks, the greater the number of dollars circulating in the economy. This increased money supply causes inflation.
Aside from the fact that the government and the banking industry are stealing the value of everyone's money at a rate of 2-4% per year, why does this matter? Every time economic growth slows down, the FED lowers interest rates. These low interest rates provide a (false)price signal to entrepreneurs that there is a large amount of unspent savings in the economy. This entices the entrepreneur into growing a few more crops, raising a few more chickens, building a few more shopping malls and houses. The lower interest rates also lure consumers to borrow and consume these items. This gets the economy growing again...why then is this so bad? Because it is a short-term solution which causes the problem to be worse in the long-run. The economy starts growing again, but the total debt levels go up faster than the economy grows.
The above chart is a few years old. Total private/non-governmental debt as a percent of GDP is now 375%.
If a business consistently increases its total debt burden 10% per year in order to grow its yearly income by 5%, it will eventually go bankrupt due to not being able to service that debt. In the same way, if a person borrows and mortgages everything he can at 10% in order to invest in a CD at 5%, he too would be considered foolish. This is basically what occurs to the country as a whole when the FED keeps interests rates artificially low.
Sadly, most politicians do not understand the issue, think only in the short-term (next election year), or actually want to enslave everyone to the banking interests (Proverbs 22:7). Ron Paul is different.
