3. On The Federal Reserve -Monetary Policy a. Provide a brief historical overvie
ID: 1109354 • Letter: 3
Question
3. On The Federal Reserve -Monetary Policy a. Provide a brief historical overview of the Fed-consider highlighting the following: i. Key dates and details that trace how the institution has evolved from its founding as "First Bank of the United States". b. Describe in detail the monetary policy tools of the Fed- but first, define monetary policy i. Open market operations, discount rate, federal funds rate, required reserve ratio. Include a description of the most recently used (not listed above and most recently terminated...hint..starts with a ""...) and its overarching purpose to impact economic growth.Explanation / Answer
i)
The first bank of United States was created in 1971, named as “Bank of the United States”.
The main purpose of the bank was to maintain stability of the American banking system.
The banking system of United States has been evolved from a long period of time.
Several landmark changes have taken place in the system depending upon the changes in environment.
The congress chartered the second bank of United States in 1813. Because of extreme distrust of notable economists to the second bank it did not get renew after the expiration of the bank.
The expiration of the second bank once again led to a period of banking dominated by state-chartered banks. That’s why the era after the expiration of second bank is known as “wildcat” era.
It resulted in number of non chartered banks with their own currencies leading to chaos in the banking system.
After the civil war the need of for a better monetary and banking system was felt. Several reforms and legislations were introduced in this regard.
The establishment of National Banking Acts of 1863and 1864 resulted in creation of banking system and uniform national currency.
Still there several problems associated with the system such as lack of central decision making authority for providing funds for growth and to manage money supply based on what the economy needed.
Such problems led to a great chaos of 1907. Many banks had to stop exchanging gold for paper money because of lack of adequate reserves. New York banks failed and many people lost their jobs.
The panic of 1907 paved the way for creation of a central bank.
The Federal Reserve Act established the Federal Reserve System which started working as central bank to the economy. The foundation of central bank was solution of problems emerging in 1907 because of lack of central decision making authority.
b. i) Monetary policy is a measure to cotrol money supply in an economy. It could be expansionary wherein central bank aims to increase money supply or it could be contractionary monetary policy intends to reduce money supply.
Open market operation include buying or selling government securities in open market. Under expansionary these securities are being bought at higher prices and incontractionary these are being sold.
Disvount rate is the rate at which central bank gives credit to commercial banks. If money suppy has to reduced the rate gets increased otherwise reduced.
Required reserve ratio is the minimum reserve of total deposit that each commerical bank has to keep and should not give in lending.
Quota rationaing is naother technique that is used in monetray policy . The central bank fixes quotas for different business activities. The commercial bank cannot exceed the quotas limits while granting loans.
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