Macroeconomic Impact
In order to achieve stability in the nation's economy, the creation of a centralized banking system was put into place to target double digit inflation. The Federal Reserve System was created 1913 with the hopes of increasing the supply of currency.
Monetary Policy
Monetary policy is the process by which the government, central bank or monetary authority manages the money supply to achieve specific goals. These goals include constraining inflation, maintaining an exchange rate, achieving full employment or economic growth (Monetary policy, Wikipedia). There are two forms of monetary policy, expansionary and contractionary policy. In expansionary policy, the Federal Reserve Bank ("Fed") is used to fight unemployment by lowering its interest rates and to increase the supply of money. In order to do this, the Fed will buy securities, lower the reserve ratio or lower the discount rate. Its purpose is to make bank loans less expensive and more available which increases the aggregate demand, output and employment. In contractionary policy, the Fed will try to reduce the aggregate demand by limiting the supply of money as well raising interest rates to fight inflation. The characteristics are opposite of expansionary policy. The Fed will sell securities, increase the reserve ratio and raise the discount rate. This is done to try to achieve the tightening of money in order to reduce spending and control inflation (McConnell & Brue, 2004, pp 11-12).
Federal Reserve
There are 12 regional Federal Reserve Banks in the United States, which were established by Congress to operate as the arms of the nation's central banking system. They are located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Lois, Minneapolis, Kansas City, Dallas and San Francisco (Federal Reserve System).
The Federal Reserve currently has two legislated goals; they are price stability and full employment. In 1978, the Federal government was charged with promoting full employment and reasonable price stability by the Full Employment and Balanced Growth Act (Thorbecke, 2002, p. 255). One of the reasons in which the government should continue to give emphasis to full employment is that under the mandate, the U.S. has experienced low unemployment and low inflation. Secondly, the costs of unemployment are known to be considerable. Thirdly, central bankers tend to be inflation-averse and occasionally need to be prodded to pursue goals other than reducing inflation.
With George Washington is agreeing with the plan to build the bank with Alexander Hamilton, they had to decide where it was going to be built. Alexander Hamilton and George Washington decide to place the National Bank in Philadelphia. This provided three hundred plus jobs and more tax collector offices. After Alexander Hamilton and George Washington agreed on Philadelphia they had to decide how the system of the bank was going to work. The bank was going to be used for loans, accepting deposits, issuing banknotes and purchasing securities. Five out of the twenty five were picked by the United States and the twenty others were picked by the private investors. The bank had to have investors to provide loans to consumers to make a profit on the fees and
Before we begin our investigation, it is imperative that we understand the historical role of the central bank in the United States. Examining the traditional motives of this institution over time will help the reader observe a direct correlation between it and its ability to manipulate an economy. To start, I will examine one of its central policies...
Looking back to the outset of the 19th century, it is impossible to say that any real banking system had really been developed in the US. This is to say that, though there were roughly 120 private commercial banks that had been chartered by new state governments, the so-called system was scarcely organized. It was ad hoc in nature and directly linked to the merchant banking practices of the pre-independence period. The years preceding the turn of the century were important because they brought a central banking authority onto the scene. In 1789 the new federal government established a position for the Secretary of the Treasury. As we know, the first to hold this prestigious title was Alexander Hamilton. He accomplished a great deal in the 11 years leading up to the year 1800. Most notably his actions were largely responsible for the creation of the First Bank of the United States, which was given a charter in 1791. This thrust towards central banking was only to last 20 years, however. Up for review in 1811, the bank’s charter was not renewed.
In 1913, Wilson and Congress passed the Federal Reserve Act to make a decentralized national bank containing twelve local offices. By and large, all the private banks in every district possessed and worked that separate area's branch. In any case, the new Federal Reserve Board had the last say in choices influencing all branches, including setting financing costs and issuing money. This new managing an account framework settled national funds and credit and helped the monetary framework survive two world wars and the Great
The Federal Reserve controls the economy of the United States through a variety of tools. They use these tools to shape the monetary policy of the United States in order to promote economic growth and reduce the rate of inflation and the unemployment rate. By adjusting these tools, the Fed is able to control the amount of money in the supply. By controlling the amount of money, the Fed can affect the macro-economic indicators and steer the economy away from runaway inflation or a recession.
The Federal Reserve System is the central banking authority of the United States. It acts as a fiscal agent for the United States government and is custodian of the reserve accounts of commercial banks, makes loans to commercial banks, and is authorized to issue Federal Reserve notes that constitute the entire supply of paper currency of the country. Created by the Federal Reserve Act of 1913, it is comprised of 12 Federal Reserve banks, the Federal Open Market Committee, and the Federal Advisory Council, and since 1976, a Consumer Advisory Council which includes several thousand member banks. The board of Governors of the Federal Reserve System determines the reserve requirements of the member banks within statutory limits, reviews and determines the discount rates established pursuant to the Federal Reserve Act to serve the public interest; it is governed by a board of nine directors, six of whom are elected by the member banks and three of whom are appointed by the Board of Governors of the Federal Reserve System. The Federal Reserve banks are located in Boston, New York, Philadelphia, Chicago, San Francisco, Cleveland, Richmond, Atlanta, Saint Louis, Minneapolis, Kansas City and Dallas.
389). Federal Reserve Banks has twelve regional districts throughout the United States, each banks with 9-member board of directors. Some of their responsibilities would include; distribution of currency, act as a central clearing system (clear checks), supervise banks, and department of Treasury functions. They are also responsible for setting and changing the discount rates and act as the commercial bank of the U.S.
"Monetary Policy is the most significant function of the Fed; it is probably the most-used policy in macroeconomics" (Colander, 2004, p. 661). This paper will discuss and elaborate on "The Monetary Policy Report" submitted to the Congress on February 11, 2003 and concepts of Macroeconomics by David Colander. The state of the economy, concerns of the Federal Reserve, and the stated direction of recent monetary policy will also be discussed.
Some of the advantages for the federal government establishing a national bank is that it would allow them a place to store their government funds, issue currency and collect taxes. States felt threatened by a national bank because it would take the local bank 's business by competing with them.The state also thought the people inside the national bank were corrupt, and that the federal government was exerting too much power over them by attempting to curtail the state practice of issuing more paper money than they were able to redeem on demand. Yes the United States government has the authority to establish a national bank because that clause allowed them to do what is necessary and proper, and congress needed a way to carry out their
The steady growth of inflation in 2007 and 2008 suggest that the Federal Reserve applied discretionary powers to avoid tightening. Tightening is inflation growing too fast. In 2009 the feds needed to be concerned about the deflation because the average inflation rate dropped to -.4%. Inflation tends to follow movements and they are closely related to the business cyc...
Author Unknown (1994). The Federal Reserve System: Purposes and Functions (5th ed.) Published by Library of Congress
Monetary policy is said to be expansionary when it increases the total supply of money in the economy more rapidly than usual. But it can also be termed as contractionary if it expands the overall money supply in a slower rate or shrink it. The price at which money can be borrowed at is usually referred to as the economy’s interest rates. The main aims of monetary policies are: control inflation, control economic growth, unemployment and the exchange rates.
In Ackley's view, monetary policy is viewed as being a cautious effort by monetary authorities (C. B. N) to control or regulate the stock of money or credit conditions for the tenacity of achieving certain economic objective. One objective of monetary policy is the realization of the high rate of or full employment, this doesn’t suggest that there is zero unemployment since there is always an amount of friction due to voluntary or seasonal unemployment (Ackley, 1978).
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.
Monetary policy is the “actions of central banks, in the United States culminating in the Federal Reserve, designed primarily to maximize employment and moderate inflation” (483. The central bank, or main enforcer, of monetary policy for the United States would be the Federal Reserve. In other words, this means that the Federal Reserve, mainly, controls interest rates and manipulates the national money supply. This would allow for some control of employment rates and inflation rates, especially during a period of financial crisis.