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Monetary Policy Financial Institutions and the Economy Essay Example

Monetary Policy Financial Institutions and the Economy

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 Civil War brought in a new central bank which, too, lasted about 20 years. 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) “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”.  The U.S., and by extension, most of the rest of the world, became a fiat economy, one in which bank notes act as unsecured loans to the government. Now, the Federal Reserve Bank wields enormous influence over the United States economy yet has no real oversight by Congress and the Chairman’s term is greater than the President’s. Alan Greenspan, former Chairman of the Fed, did not believe any central bank should be removed from the electoral process (Mayer, 80). In 1894, Friedrich Engels predicted the end of market collapses since the world had shrunk with the inventions of steamships, telegraphs, railroads and the Suez Canal. With excess capital spread throughout the world, local over-speculation should diminish to irrelevance. (Mayer, 1) The Federal Reserve now regulates financial institutions, banks, and the money supply.

preview essay on Monetary Policy Financial Institutions and the Economy
  • Pages: 8 (1750 words)
  • Document Type: Essay
  • Subject: Finance & Accounting
  • Level: Masters
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