It is absolutely essential that the American people educate themselves on this very important topic. Most of the Presidential candidates, and most voters, are oblivious to this, and Dr. Paul's talk of the Federal Reserve is regarded as off-topic at best and insane at worst.

But, Dr. Paul and the free market ("Austrian School") economists are right. Actions of the Fed have serious consequences. Most people do not agree because most people seem to think that consequences must follow right on the heels of the actions. This is not necessarily true. When you begin a regimen of vitamins, good health does not come in a day. You must continue the regimen for weeks before you begin to feel healthy. By the same token, the results of a change in Federal Reserve policy will not manifest themselves for months, even years.

People must consider the long term consequences of actions. An increase in the money supply will adversely affect the real wealth of most people in the long run.

But, exactly why will this happen?

For one thing, the marginal value of a dollar decreases as the money supply is increased by the Fed.

Here is how. For an imperfect analogy, imagine you are in a forest in the early fall, before most of the leaves show their fall colors. But, there is one maple leaf that is already brilliant and you stand there and admire it as one would the Mona Lisa. It is precious, too precious to take as you would like others to admire it. A few weeks later, you go back to that forest and now there are hundreds of maple leaves that are gorgeous. If a rabbit is eating one of them, you don't care. The value of one such leaf is greatly diminished if there are hundreds of them.

By the same token, the more dollars there are in the economy, the less each one is worth. When the Federal Reserve "creates" more money by printing more dollar bills (or, today it can be done by computer), prices in dollars rise. It is supply and demand. If there are more dollars, then there are more dollars in people's pockets and people are more likely to part with them. Vendors know this, and when business picks up, they know they can raise their prices and still sell their goods. Inflation becomes more obvious.

That is not the worst thing about inflation. What is worse is that inflation is uneven. The new money created goes to establishment cronies first, so they get first crack at the market with it before the inflation causes prices to rise.

Let's have another imperfect analogy to illustrate this.

Say you have a cup of coffee and add cream to it. Imagine that coffee is the economy, molecules of the coffee being the participants in the marketplace. The cream is the money injected by the Fed. If you pour your cream slowly at the edge of the cup, you'll notice that the cream diffuses from that point and for a short time the coffee closest to that point is very creamy, while the coffee at the other side of the cup is still black. The "money" (cream) goes to the "establishment" first (closest to the source), while the "participants" (coffee molecules) at the other side of the "economy" (cup) have to wait.

In the actual economy, the money created by the Fed goes to the big guys in the form of bailouts and "quantitative easing." We kept hearing during bailouts from the little guy (sometimes tongue in cheek), "So, where's mine?" or something about "Obama money" from the "Obama stash." But, of course, ordinary people at the other side of the "cup" never saw dime one, but come April 15 we all had to ante up our three pounds of flesh.

If we had a free country here (which we don't!!!), nobody would have seen dime one, and nobody would have to pay a dime on April 15.

But, as things are, the banks, big businesses and their fatcats got a big handout and off they went to spend all the new money on everything you can imagine, their new demand driving prices up shortly thereafter. We are now beginning to see the results. The price of gasoline has risen for a few reasons and this inflation is one of the reasons. Other prices are creeping up too.

Meanwhile, this new money has not reached the little guy, and won't until after prices have risen. This is how harm is done. The big guy is benefitted at the expense of the little guy. This is why I have said over and over again that the Federal Reserve's policies cause wealth to gravitate toward establishment interests.

I am not even getting into the economic distortions and malinvestment that occurs. Just read Ron Paul's End the Fed and the titles listed at the end. Or, start with my reviews of some of Dr. Rothbard's works. Suffice it to say that market signals are messed up and investments are made in areas that the marketplace does not truly want. Market signals are to investors as traffic signals are to drivers. Imagine if traffic signals were going crazy. Would you even leave the house?

And, I am not even getting into interest rates. An increase in the money supply means an artificial decrease in interest rates and that, of course, discourages saving and encourages debt.

The Fed is playing God.

No government entity...and, make no mistake, the Fed is...should be tampering in this manner. The medium of exchange should be a commodity such as gold, as determined by the market. For human beings to print out paper and decree it to be "legal tender" is as dangerous to the economy as government control of the weather would be to the earth. Areas of this sort should be controlled by God (or nature, or the "unseen hand of the market, if you prefer). As far as the money supply is concerned, we human beings are fallible and greedy, and there are too many temptations to steal. And, stealing it is when we have the Federal Reserve gravitating wealth toward establishment interests.

This is really a big topic. I hope this paper has helped you understand or helped you help someone to understand. Economist and historian Murray Rothbard has written extensively and I reviewed some of his works on monetary policy. 

Please check it out at: http://www.alicelillieandher.blogspot.com and click on "2009 (9)". My review of Power and Market comes first, but after that it is strictly Murray Rothbard on monetary policy. Please enjoy it and weigh in yourself on the comments!