I am just so sick and tired of people being fans of Ron and Rand Paul because of their explanations of the evils of fractional reserve banking. People think what the Pauls say about banking and the FED is brilliant, when in fact it is idiotic.

Here is the YouTube comment by slowpoke692 that finally got me to post this.

I mean does it realy take Bernie Sanders to tell you who is ripping you off! Anything you do or say is a waste of breath until something is done about fractional reserve banking and the federal reserve!

Fractional reserve banking was invented thousands of years ago. The apocryphal story you read in economics text books and the one that Ron Paul says he heard from an Economics Professor is that some people had a business of storing other people’s fungible valuables (gold) for safe keeping. Soon one of these businesses realized that most of the gold sat in the warehouse, and only a small fraction was ever requested at any one time by the depositors. So the business realized that they could actually charge for lending out some of the gold in the warehouse, and the owners of that gold would never be inconvenienced by the fact that not every ounce of their gold was all sitting in the warehouse. Not only would the customers never be inconvenienced by this way of doing business, but owners could even get a share of the money earned from the loans. In his own writings, Ron Paul says that when he heard this, he realized it was a massive fraud that needed to be stopped when modern day banks do it with their depositors’ money (and pay interest on the deposits). I don’t think he ever learned another thing about economics after this revelation stopped him in his tracks.

What Ron and Rand Paul and their adherents don’t seem to recognize is that this fractional reserve business is done in everyday transactions by individuals who have nothing to do with banking.

When you buy something from a company and hand your money over before they deliver the product, how do you know that the product is actually sitting in a warehouse at the time you make the purchase? If it isn’t, then that is just like borrowing money from a bank that isn’t actually sitting in the bank when you borrow it. Who is going to insist, check up on, and enforce a requirement that what the store just sold you is actually in the warehouse at the time they sold it to you? The cost of goods would be higher if businesses had to pay for the warehouse space to store a product before it could be sold. The whole concept of just-in-time delivery rather than storing inventory for future use in manufacturing is one of the Japanese innovations that let them build high quality cars more cheaply than the inferior product made in Detroit at the time.

The Pauls never tell you that doing away with fractional reserve banking would also do away with bank accounts that paid the depositor interest. The banks would actually have to charge you for the service of keeping your money safe.

So, do you still think that the Pauls are brilliant economists? Or do you realize what idiots or snake oil salesmen they are?

By the way, if you have ever held an interest bearing account in a bank, or ever received a “free” toaster for opening up an account, what does it say about your intelligence if you never stopped to even wonder how the banks could afford to do this?