Monetary Policy Essay Example | Topics and Well Written Essays - 2000 words

Monetary Policy - Essay Example A stock has no maturity date; the investor owns a portion of the business. Financial institutions move money from those with excess to those with shortage through financial instruments. Supply, investors, and demand, entrepreneurs, dictate the terms and conditions of the trades facilitated by the financial institution. Commercial banks, savings banks, formerly savings and loans, thrift institutions, securities traders and investment bankers, finance companies, mutual funds, insurance companies and pension funds all serve as financial institutions, but with differing regulations (Saunders and Cornett, 2007). The History and Current Role of the Federal Reserve System Mayer (2001) defines a central bank as a bank of issue, meaning it creates currency to represent wealth. Many American patriots like Tom Payne and Tom Jefferson thought only state chartered private banks should issue bank notes because governments that can pay bills by printing money generally did so. Money is a commodity, just like bread, eggs and butter. If the supply of money increases without value to back it up, inflation occurs and all prices rise (56). A central bank is a lender of last resort. When all banks clear their transactions through a central bank, the central bank smoothes volatility problems through loans. All banks remain solvent by leaving reserves at the central bank, and then the bank lends money to create more reserves. (57) The central bank regulates financial institutions. (79) In 1791, Alexander Hamilton convinced President George Washington to implement a central bank over the protests of Jefferson and Madison. By 1811, Madison became President and did not renew the charter. The end of the... Mayer (2001) defines a central bank as a bank of issue, meaning it creates currency to represent wealth. Many American patriots like Tom Payne and Tom Jefferson thought the only state chartered private banks should issue bank notes because governments that can pay bills by printing money generally did so. Money is a commodity, just like bread, eggs, and butter. A central bank is a lender of last resort. When all banks clear their transactions through a central bank, the central bank smoothes volatility problems through loans. All banks remain solvent by leaving reserves at the central bank, and then the bank lends money to create more reserves. The central bank regulates financial institutions. (79) In 1791, Alexander Hamilton convinced President George Washington to implement a central bank over the protests of Jefferson and Madison. By 1811, Madison became President and did not renew the charter. The end of the Civil War brought in a new central bank which, too, lasted about 20 yea rs. World War I, 1913, brought the Federal Reserve Act to form a compromised central bank with 12 regional banks. This compromise did not regulate disputes among the banks or with Washington, D.C. (Wells, 2004). As long as the gold standard was in place, the 12 banks could not print more money than was reserved. Friedman states (1994, p.250) â€Å"The 1974 removal of the prohibition against private ownership of gold in the United States was, somewhat paradoxically, a tribute to the end of gold’s monetary role†.