September 29, 2010
In 1913 under the Federal Reserve Act, the central bank of America was formed and came to be known as the Federal Reserve. The central bank was put in place to limit the financial panic associated with the economy as well as to help prevent bank runs. Though over time there functionality has changed and expanded greatly, their importance to America’s economical well being has not (Hubbard & O’Brien, 2010).
The focus of this paper will look to define the purpose and function of money and give an explanation regarding how the central bank manages the nation’s monetary system. The paper will also focus on the recent monetary policy of the United States and different actions that have been taken by the Federal Reserve to ensure their enactment. Last, the paper will explain the effect the monetary policies have on the economy’s production and employment.
A simple definition for money would be anything that could be used for payment of goods and services. The definition give by most economists is, “A medium of exchange that is widely accepted in payment for goods and services and in settlement of debts.” Money however began as what is called commodity money, which could be anything with value such as trading a goat for cheese. This, however, was also considered bartering in earlier days. Today citizens use what is called “fiat” money, which is money that has no worth but has been given its value from the government declaring it to be legal tender. Money’s purpose and true function is to provide individuals globally with a way to simply buy and trade commodities (n.a., 2009).
In America the Federal Reserve or the central bank manage the nation’s monetary system. The central bank can manage and control through different monetary policies put in place to help prevent issues such as over inflation, recession, and ultimately depressions. This is done through the maximization of national employment, attempting to hold the prices of goods and services stable and last by moderating interest rates. The Board of Governors and the Federal Open Market Committee (FOMC) are the entities that put all of the monetary policies into motion. Their ultimate goal for America is the stability of price. Unfortunately, they have had to make tough decisions especially lately when they had to choose between both higher unemployment and lower production or dealing with the price pressure and ultimately raising inflation that would weaken the economy even greater (Monetary Policies, 2009).
In looking at the direction of economy in the most recent report, July 2009, to Congress from the Federal Reserve it stated that though most sectors of the economy showed major decline in late 2008 and early 2009, but that the economy in most sectors were on the incline or stabling out. However, it did state that household individuals and business have remained tight in their spending and that financial institutions remain stressed. It also stated that job losses still remain sizeable, however; that it is beginning to stabilize. It states that in the beginning of 2009 the GDP fell, but at this point has begun to level off and that the construction of new housing and individuals desire for new housing has begun to increase after three years of declining figures (Monetary Policies, 2009). In regards to the monetary policies the chairperson, Ben Bernanke, stated that the Federal Reserve has continued to be strong and proactive in dealing with the not so favorable market developments. He stated that the Federal Reserve continued to provide funding to financial institutions and different markets. In February, the Federal Reserve along with the Treasury department and other governmental groups launched the Financial Stability Plan. This plan was a Capital Assistance Plan used to survey the strengths and weaknesses of financial institutions and help each of them according...