Federal Reserve
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- Date Submitted: 03/28/2011 03:18 PM
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Federal Reserve
The Federal Reserve Bank was established by the United States government in the 1930s to stop society from bank panics but its role has since grown to include managing the country’s money supply (Hubbard & O'Brien, 2010, p. 842).
The role of money in society is crucial, which is why it is important to have an insittution overseeing it on a full-time basis. Paper money and coins exist because they are the most efficient way to purchase goods and services. Before money existed, goods and services were purchased through the barter system (trading one good for another), which is not efficient. For example, if all dentists were paid with chickens, they would have more chickens than they need, and would no longer offer dental services to their customers. Money has afforded people the opportunity to become highly specialized in a specific field because they can use money to buy all other goods and services they need (Hubbard & O'Brien, 2010, p. 827). Until the 1970s, money represented a promise that could be redeemed for a fixed amount of gold or silver. Now, this is no longer the case, but money is instead backed by the “full faith and credit” of the United States government.
The Central Bank is responsible for printing money and setting interest rates in order to control the supply of money available to citizens. When there is too much money available (too much money chasing too few goods), then inflation occurs. When there is too little money available, then deflation occurs, and economic growth slows or becomes negative (i.e., a recession). The central bank is separate from the federal government so that the government does not attempt to use the bank for political reasons (Hubbard & O'Brien, 2010, p. 967). Another reason the bank remains separate is to ensure the government does not sell its bonds only to the bank and not to the public thus causing inflation to rise (Hubbard & O'Brien, 2010, p. 967).
The current monetary policy focuses on the...
The Federal Reserve Bank was established by the United States government in the 1930s to stop society from bank panics but its role has since grown to include managing the country’s money supply (Hubbard & O'Brien, 2010, p. 842).
The role of money in society is crucial, which is why it is important to have an insittution overseeing it on a full-time basis. Paper money and coins exist because they are the most efficient way to purchase goods and services. Before money existed, goods and services were purchased through the barter system (trading one good for another), which is not efficient. For example, if all dentists were paid with chickens, they would have more chickens than they need, and would no longer offer dental services to their customers. Money has afforded people the opportunity to become highly specialized in a specific field because they can use money to buy all other goods and services they need (Hubbard & O'Brien, 2010, p. 827). Until the 1970s, money represented a promise that could be redeemed for a fixed amount of gold or silver. Now, this is no longer the case, but money is instead backed by the “full faith and credit” of the United States government.
The Central Bank is responsible for printing money and setting interest rates in order to control the supply of money available to citizens. When there is too much money available (too much money chasing too few goods), then inflation occurs. When there is too little money available, then deflation occurs, and economic growth slows or becomes negative (i.e., a recession). The central bank is separate from the federal government so that the government does not attempt to use the bank for political reasons (Hubbard & O'Brien, 2010, p. 967). Another reason the bank remains separate is to ensure the government does not sell its bonds only to the bank and not to the public thus causing inflation to rise (Hubbard & O'Brien, 2010, p. 967).
The current monetary policy focuses on the...