Is Ron Paul Crazy? Part I

I certainly used to think so.

I admired him during the debates for the Republican nomination for President in the summer of 2007 because of his strong commitment to limited government, the Constitution, and bringing troops not out of just Iraq, but from all over the world. But then he would go on rants about returning to the gold standard and how Federal Reserve policy was going to lead to a financial disaster.

Let's start with an analysis of the gold standard.

Is Ron Paul Crazy? Part IV

After a nearly 15 month hiatus I am finally ready to conclude my series on Ron Paul. I felt the break was necessary so I could take the time to fully understand Austrian Business Cycle Theory.

Parts I - III dealt with the gold standard, fractional-reserve, and central banking. I will now conclude the analysis of Ron Paul's policies by laying out Austrian Business Cycle Theory. This is important as it is relevant to current affairs, more specifically, the recent rise in food and oil prices.

Austrian Business Cycle Theory tells us that any increase in credit money will lead to a boom that must be followed by a bust as the credit money is contracted, so long as the credit money is invested in capital goods. The increase in credit money, or inflation, leads to many investments during the boom that are later revealed to be malinvestments during the bust. The theory is clear; if we wish to avoid the bust, we must not allow the boom.

Is Ron Paul Crazy? Part III

The Federal Reserve is a Central Bank. A Central Bank provides a government with its currency. Because of legal tender laws making it illegal for citizens of the US to use any other currency other than Federal Reserve Notes (USDs), the Federal Reserve is the sole producer of the nation's money supply. This is also known as a monopoly.

The Federal Reserve is made up of 12 regional banks. Directing the actions of these banks are what is known as the Board of Governors and the Federal Open Market Committee. Both of these are federal agencies. When a government agency has official control of a monopolized good (in this case money) that is socialism (or fascism, but that is a whole other topic!). Every country in the world has socialized money.

Is Ron Paul Crazy? Part II

In the previous post I focused my attention to an analysis of the gold standard and how gold came to be used as money. This post will focus on another of Ron Paul's "crazy" policy platforms; End the Fed. Discovering and understanding the nature of the Fed must begin with a discussion of inflation and fractional-reserve banking.

Despite what you hear on the news or read in the Wall St Journal, Economist, or NY Times, inflation is not an increase in the price level. Inflation is an increase in the money supply. While it is true that inflation tends to lead to an overall increase in prices, it does not necessarily have to be so. It is perfectly possible that the price level can decrease after an increase in the money supply.

While most people have heard of the term inflation, few have no idea whatsoever as to to what fractional-reserve banking is. By law, banks are only required to keep a certain percentage of their cash obligations on hand. For example, say the US requires that all banks must keep 25% of the cash on hand that it owes to owners of checking accounts. Now I go to my bank and deposit $1000. Because, by law, the bank only needs to keep 25% of this $1000, $750 (called bank credit) are available to be loaned out by the banker. While my check balance shows that I have $1000 in the bank in reality there is only $250.

Now this math may not seem to add up to most people. That's because it does not. You may also think that it sounds an awful lot like a pyramid, Ponzi, and now Madoff scheme. That's because it is.