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Monetary Policy Financial Institutions and the Economy Essay Example

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Monetary Policy Financial Institutions and the Economy

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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. Monetary Policy Financial Institutions and the Economy.

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Batra, Ravi. (2005) Greenspan’s fraud: How two decades of his policies have undermined the

global economy. New York: Palgrave Macmillan.

Black, William K. (2005). The best way to rob a bank is to own one: How corporate executives

and politicians looted the S&L industry. Austin, Texas: University of Texas Press.

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Harcourt Brace & Company.

Mayer, Martin. (2001) The Fed: The inside story of how the world’s most powerful financial

institution drives the markets. New York: The Free Press.

Roche, Cullen. (2011) The myth of the exploding U.S. money supply. Pragmatic Capitalism-Blog.

Retrieved March 7, 2011, from Seeking Alpha Web site: http://seekingalpha.com/article/256913-on-the-myth-of-exploding-u-s-money-supply

Saunders, Anthony and Cornett, Marcia Millon. (2007) Financial markets and institutions: An

introduction to the risk management approach. New York: The McGraw-Hill Companies, Inc.

Wells, Donald R. (2004) The Federal Reserve System: A history. Jefferson, North Carolina:

McFarland & Company, Inc.



“1. M1 consists of:

(1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions;

(2) traveler's checks of nonbank issuers;

(3) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and

(4) other checkable deposits (OCDs), consisting of negotiable order of withdrawal (NOW) and automatic transfer service (ATS) accounts at depository institutions, credit union share draft accounts, and demand deposits at thrift institutions.

Seasonally adjusted M1 is constructed by summing currency, traveler's checks, demand deposits, and OCDs, each seasonally adjusted separately.” (Federal Reserve Site, 2011)

“M2 consists of M1 plus:

(1) savings deposits (including money market deposit accounts);

(2) small-denomination time deposits (time deposits in amounts of less than $100,000), less individual retirement account (IRA) and Keogh balances at depository institutions;

(3) balances in retail money market mutual funds, less IRA and Keogh balances at money market mutual funds. Seasonally adjusted M2 is constructed by summing

savings deposits, small-denomination time deposits, and retail money funds, each seasonally adjusted separately, and adding this result to seasonally adjusted M1.” (Federal reserve Site, 2011)

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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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