Some say money is the root of all evil. Those who have it do not know what to do with it and those who want it dream of having it. The creation of money has always been somewhat confusing. The Federal Reserve uses various tools to control the money supply. Theses tools influence the money supply and in turn affect macroeconomic factors. To better understand the purpose and structure of the Federal Reserve we writing expectations, all instances first have to understand how money is created and which combinations of monetary policy best achieves a balance between economic growth, low inflation, and a reasonable rate of unemployment.
Prior to the creation of money, society would use the barter system to obtain everyday necessities. A prime example of this would be when a farmer harvested his various produce, collected eggs his chickens laid, raised cows for their milk, and pigs for meat. He would take his inventory to town and obtain the things he needed by exchanging his goods for horses, food, or clothing. As time passed gold was discovered and was considered as a form of money where it could be exchanged for the everyday necessities of life. Each time a purchase was made, the gold had to be weighed and have a value placed on it. This became time consuming so a goldsmith would hold the gold and issue receipts for the gold that could be exchanged for goods and services from the different businesses in town.
When someone borrowed gold from the goldsmith, instead of taking the loan in the form of gold, the person accepted the paper IOUs of the goldsmith. Since people accepted these paper IOUs as money, this transaction increased the amount of money in circulation. When the goldsmiths began to create money, their careers as bankers began. (J. A. Ferris,1969)
Monetary policy is the process by which governments and central banks manipulate the quantity of money in the economy to achieve certain macroeconomic and political objectives. The targets are usually economic growth, changes in the rate of inflation, higher level of employment, and adjustment of the exchange rate. Monetary policy is categorized into two types: contractionary and expansionary. Contractionary (or "tight") monetary policy aims to reduce the amount of money circulating through the economy. Expansionary ("loose") policy, on the other hand, aims to increase the money supply.
Conversion to modern worth: Lawrence H. Officer and Samuel H. Williamson. « Purchasing Power of Money in the United States from 1774 to 2010 » MeasuringWorth. 2011.
Georg Friedrich Knapp, a German economist, states, “Money…is not chosen for any properties of the metals, but for the deliberate purpose of influencing exchanges…” (Knapp, 1924). His statement illustrates his belief that money has no value in of itself, and that its primary function is to serve as a medium of exchange. Many economists shared Knapp’s perspective on money and these collective opinions formed one of the dominating schools of thought regarding money; chartalism, which is the belief that money has no intrinsic value, and that its value is whatever the government declares it to be. Although many economists supported this perspective, there were others who contested it and became supporters of this theory’s counterpart; metallism,
One of the main catalysts for these changes was wealth… gold and silver, in particular. Along with foods and supplies that were very valuable to the Europeans, explorers quickly found that gold and silver were almost taken for granted in the Americas because they were available in such bountiful amounts. Adventurers almost immediately began to ship back boatloads of these precious metals to their home countries. However, although the increase in economic activity led to an increase in many nations’ money supply, it also brought on inflation. Inflation occurs when people have more money to spend and thus demand more goods and services. Because the scarce supply of goods is less than the demand requires, the goods become both scarce and more valuable. As a result, prices rise drastically. For example, Spain endured a crushing spell of inflation during the span of the 1600s, when boatloads of silver and gold from the Western Hemisphere increased the nation’s money supply. Other than inflation, changes in European economy included the introduction of practices like capitalism, mercantilism, and joint-stock company, due to advancements in economics. The Commercial Revolution, which was a term used to define new business and trade practices in Europe during the 16th and 17th centuries that dramatically changed the economic atmosphere of the country,
Over the years, money has changed drastically. Since the beginning, anywhere there is civilization there has been some sort of currency, and it changes due to the advancement of people. People are willing to do more for money if there is a reward involved. Money started out as simple things such as: fur, horns, meat, things like that, and people would trade them. After that money became things like silver or gold coins. Once this became a big success people realized the value of silver and gold has and realized it was really expensive. After they realized this they made a more simpler form called, fiat money. Sacagawea named the fiat money. Fiat money has been a huge success and took a huge leap in the economy. It was cheaper to make and easier
The Federal Reserve System is the central bank which regulates and controls the monetary and banking system. Their primary focus is to regulate the health of the economy as a whole and implements monetary policy to help increase the money supply during a downturn, and restrict the money supply during periods of excessive growth. During periods when the economy faces high inflation, federal reserve will use contractionary monetary policy by decreasing money supply which in turn results in higher interest rates, lower investment spending, and lower consumer spending. In contrast, when the economy encounters a recession, federal reserve will utilize expansionary monetary policy by cutting interest rates or increasing the money supply to boost economic activity. During expansionary monetary policy, higher investment spending will raise income and higher consumer spending will help the economy. A tight (contractionary) monetary policy occurs when Federal reserve (central bank) raises the
"Monetary policy is a policy of influencing the economy through changes in the banking system's reserves that influence the money supply and credit availability in the economy" (Colander, 2004, p. 659). Monetary policy also refers to the actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals. The Federal Reserve Act of 1913 gave the Federal Reserve responsibility for setting monetary policy. The Federal Reserve controls the three tools of monetary policy- open market operations, the discount rate, and reserve requirements.
Unlike any other Kingdom, Aksum was one of the best placed trading post. With many different cultures and people from different kingdoms and empires it was hard to make trades, because of different currencies. However Aksumite rulers made it much easier to trade by minting their own Aksumite currency. This minting created one of the world's first currencies, and later influenced other countries to do the same. On top of creating one of the first currencies, Aksum minted different values of currency this included gold, silver and bronze coins. Bronze being a $5, a silver being a $20 bill; and lastly the gold being a $100 bill. It was like a credit card. This was a stepping stone that helped turn the olden world into the modern world today.
Monetary policy is an extremely valuable guideline for our economy. Small changes in the money supply can affect the price level, interest rates and almost all aspects of the macroeconomic world. When looking at monetary policy, understanding the variables of each argument can help us determine a more extensive view of each policy.
Barter is the earliest form of money. Barter was used as an exchange of resources or services for the mutual advantage. It was introduced in the years from six thousand to nine thousand B.C. The first thousands of years of bartering consisted only on the barter of resources such as crops, cattle, and artifacts. Cacao beans, shells, and animal skins were all used as a form of money by early civilizations or tribes. China introduced cowrie shells into the system in 1200 B.C. This form of money was widely used around the world for a very long time. Gold was officially made the standard value in the United States in the 1900’s. This Gold Standard began to end after the 1930’s Great Depression. Decades have passed since the Gold Standard, the United States’ currency has transitioned from gold into coins, paper money, and even credit cards. Today, people barter services where a skilled or talented person preforms a job in exchange for money. Money is used to purchase things such as food, clothing, shelter, and simple luxuries.
Another problem prior to the establishment of the Federal Reserve System was the inelasticity of bank credit and the supply of money. Small banks placed their excess reserves in large central reserve banks. Whenever a bank’s depositors wanted their funds, the smaller banks would be covered by the central banks. The system worked well during normal conditions. Some banks would draw down on their reserves as other banks would be building up their reserves. In times of excessive demand, however, the problem became quite serious. When the public wanted large amounts of currency, the
There were other standards of money in different places. There were different clay tokens. People who were not as wealthy as those who paid in silver paid in less valuable metals like copper, tin, and lead, but mostly barley.
The term Monetary policy refers to the method through which a country’s monetary authority, such as the Federal Reserve or the Bank of England control money supply for the aim of promoting economic stability and growth and is primarily achieved by the targeting of various interest rates. Monetary policy may be either contractionary or expansionary whereby a contractionary policy reduces the money supply, reduces the rate at which money is supplied or sets about an increase in interest rates. Expansionary policies on the other hand increase the supply of money or lower the interest rates. Interest rates may also be referred to as tight if their aim is to reduce inflation; neutral, if their aim is neither inflation reduction nor growth stimulation; or, accommodative, if aimed at stimulating growth. Monetary policies have a great impact on the economic stability of a country and if not well formulated, may lead to economic calamities (Reinhart & Rogoff, 2013). The current monetary policy of the United States Federal Reserve while being accommodative and expansionary so as to stimulate growth after the 2008 recession, will lead to an economic pitfall if maintained in its current state. This paper will examine this current policy, its strengths and weaknesses as well as recommendations that will ensure economic stability.
In the study of macroeconomics there are several sub factors that affect the economy either favorably or adversely. One dynamic of macroeconomics is monetary policy. Monetary policy consists of deliberate changes in the money supply to influence interest rates and thus the level of spending in the economy. “The goal of a monetary policy is to achieve and maintain price level stability, full employment and economic growth.” (McConnell & Brue, 2004).
etc. In the 1930's the barter system has been employed in times of financial crisis when currencies are unstable or when there is no common currency.
In the beginning of the human kind, there was no money. The only way to get what you want is to trade what you have for it. This system is called bartering. Sometimes, you will find a person who is willing to exchange your goods. However, most of the time, it is really difficult to find the person who is willing to trade with you. Since, you desperately need to exchange, you will need to travel the whole day until you meet the right person. In this type of situation, it will take a lot of time to find the person who wants to trade with your goods. Economists defined this kind of issue as transaction costs. It is the time and effort people spend before they can exchange their goods. In barter economy, the transaction costs are incredibly high. Another major drawback of barter system is that people cannot measure the value of goods. This usually leads to conflicts since people have to make unequal exchanges. In order to reduce transaction costs and conflicts, people developed commodity money.