Full disclosure: I am not a Ron Paul fan. I know that he has a loyal and devout following but I am not one of them. He has been going around saying that the Fed has doubled the money supply. It hasn't. M2 (currency, checkable deposits, small time and savings deposits) has increased from $6.6 trillion to $8.5 trillion from 2006 to December 2009 - certainly not a doubling. What Paul probably meant was to say that the monetary base (currency plus bank reserves) has doubled - from $813 billion to $2 trillion. This is not trivial. The base is the fuel of the money supply, but it is not the money supply. The Fed can control the base by contracting reserves which will limit money supply growth. Indeed, Ben Bernanke has outlined such a plan, but I think Bernanke's plan is suboptimal. He wants to discourage the banks from making loans by paying higher rates of interest on their reserves. A more efficient way would be to raise the reserve requirement to 100 percent. Then the banks could not make any loans at all and thereby could no longer create money. Loans would still be made but through a non-depository bank subsidiary that would borrow the funds and then lend them out - much like mortgage bankers and finance companies do already. But I digress. In addition to continuing to spout misinformation, when Bernanke gave his semi-annual testimony to Congress (Humphrey-Hawkins Report) on February 24, Paul used the occasion to accuse the Fed of making secret loans to Saddam Hussein during the 1980s and funding the break-in at the Watergate. Needless to say Bernanke was taken aback, probably both by the sheer audacity of the allegations as well as their irrelevance to his testimony. Bernanke responded the Paul's charges were "absolutely bizarre." Bizarre is an understatement. Ron Paul has simply lost it - if he had "it" in the first place.
Harold A. Black is professor emeritus in the Department of Finance, University of Tennessee, Knoxville having retired after 24 years of service. He has served on the faculties of American University, Howard University, the University of North Carolina - Chapel Hill and the University of Florida. His government service includes the Office of the Comptroller of the Currency and as a Board Member of the National Credit Union Administration. He also has served on the boards of directors Home Savings of America and its parent company, H. F. Ahmanson & Co., Irwindale, California prior to its merger with Washington Mutual Savings Bank, on the board of New Century Financial Corporation, Irvine, California, then the nation’s largest real estate investment trust and as director and later chairman of the Nashville Branch of the Federal Reserve Bank of Atlanta. He writes an occasional article for the Knoxville News-Sentinel at http://www.knoxnews.com/staff/dr-harold-black/. His web page is haroldablackphd.com