If you're new here, you may want to subscribe to our RSS feed. Thanks for visiting!

The other day, a friend of mine asked me explain interest rates. He had heard about how Ron Paul and thousands of people on the Internet don’t support the Federal Reserve Bank. He mentioned that some of what they were saying made sense, but something just seemed off about how they wanted to solve the problem.

There are scores of Ron Paul supporters out there that don’t support the Federal Reserve. Their argument is that the Federal Reserve is unconstitutional and that elected officials should have control over our money supply.

But this isn’t a bash Ron Paul article. This is a quick guide (a simplified view) of the American monetary system. This is by no means an exhaustive explanation of the US money supply. There are dozens of books about the subject that cover much greater detail. This article is simply to answer my friend’s question because I believe he is not the only person who has questions about Ron Paul and the Federal Reserve.

The Federal Reserve Bank controls the amount of US dollars in circulation: the money supply. It does this through buying and selling of government securities. In theory, purchasing of government securities puts more money into the economy and selling the securities shrinks the money supply.

The money supply can expand at an even greater rate via fractional reserve banking. This is where banks can loan more money than they actually have on hand. While this might seem scary, it really isn’t in most cases. As long as there isn’t a run on the bank, the banks will always have enough money needed for day to day operations. This is a highly effective method for rapidly expanding the money supply, since it has a multiplier effect on money.

Pages: 1 2