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Discusses purposes money serves in today's economies.... More...
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Paper Abstract:
Discusses purposes money serves in today's economies. Critical task of governments and central banks in controlling the money supply. Money as the common medium of exchange; the tangible way to hold assets. Monetary policy. Growth of "virtual" money (cashless transactions). Example of CyberCoast, a fictional Northwest nation with a cashless system.
Paper Introduction:
Controlling the money supply of a nation is a critical task that falls most often to governments and central banks. If there is too much money in circulation, inflation results; too little money, and the economy contracts. The goal is to strike a balance so that there is enough money to stimulate the economy, but not so much that the economy overheats. In the United States, money supply is controlled through fiscal (tax) policy and monetary policy. The government controls the fiscal policy, while the monetary policy is controlled indirectly by the government through the central bank in most modern economies.
Money serves several different purposes in today's economies. First and foremost, it is the common medium of excha
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In this way, the Fed is required by law to follow monetaristprinciples. The Banks of CyberCoast The banks in CyberCoast will be separate from the government, butsubject to government regulation. Thus savings and loans served different customers thancommercial banks, and credit unions served yet different customersentirely. Given that leading economists of the day cannot agree on theappropriate strategy that the Fed should take, it is little surprise thatthe institution itself faces difficulty in arriving at a sound andconsistent policy. Thecurrency will be known as the mackey; in addition, there will be 1 baltsin a mackey, with balt coins available in 1, 5, 1 and 5 denominations.The symbol for the mackey will be M. While fewAmericans keep all of their assets in the form of cash (many have homes,cars and financial instruments such as stocks and bonds and actuallyrelatively little cash), some amount of cash is a hedge against thefluctuations of these other assets. Within the United States, the Fed's mission is to protect theintegrity of the nation's money by providing a healthy banking andfinancial system that is consistent with price stability and sustainableeconomic growth. References Goodfriend, M. If there is too much money incirculation, inflation results; too little money, and the economycontracts. During times of inflation, holdingcash results in a net loss to the consumer, but during times when pricesare stagnant or declining, holding cash can be a smart business strategy.Holding cash also provides additional security in the case of unexpectedexpenses, and allows the holder to take advantage of possible marketopportunities. Within thiscontext, the Fed's operational goal is to maximize the return and value ofthe Fed to its stakeholders who are, in this case, the residents andcitizens of the United States. The need to set money growth targets is established bylaw in the Full Employment and Balanced Growth Act of 1978 (Humphrey-Hawkins). The Congress sets the Fed's goalsand broad policy guidelines, and then monitors the conformance andperformance of the Fed against these. Inthe United States, money supply is controlled through fiscal (tax) policyand monetary policy. In the UnitedStates, accounts are typically insured up to $1 , . Samuelson, P. Why we need an 'accord' for FederalReserve credit policy. Both currency and coins will be used, with the currency available in1, 5, 1 , 2 and 1 denominations. The Central Bank of CyberCoast The Federal Reserve System (Fed), the central banking system withinthe United States, is comprised of districts (with Federal Reserve Banks ineach district). Instead of trading apples for oranges (or guns for butter),money provides a single exchange mechanism for all transactions within aneconomy. For consumers, these opportunities might take the form ofdiscounts on goods and services; for companies, the opportunities might becapital expenditures required to meet some unforeseen market demand(Samuelson 1989). The individual nations will also turn over management of thecurrency to a central bank serving all of the nations of the EuropeanUnion, with the goal of making the euro competitive to the dollar in theend. These banks loan money to other commercial institutionsand, based on the interest rates charged to those institutions, determinethe direction of the American monetary policy. Since the government will bebacking the deposits of CyberCoast through its own insurance program, suchrequirements are certainly within its purview. Internet address: http://www.washingtonpost.com/wp-srv/inat/longterm/euro/overview.htm. At the same time, Allan Meltzer concluded that monetary policy was tooeasy. This is to avoid some of the problemsthat the American economy went through during its formative years,including financial panics and runs on banks that caused considerabledisruption to the American financial system. A New currency to compete with the dollar.The Washington Post. By having independent yetregulated banks, CyberCoast will be able to provide the oversight necessaryto instill confidence in investors both domestically and on aninternational basis. The Europeans have taken a different approach, where the currencies ofdifferent countries are in the process of being abandoned in favor of thesingle euro. (1999, January). Money can be used to pay for time, products, services, and allother transactions (including financial transactions such as payinginterest) that take place in an economy. As an example, financial institutions in the United States wereprohibited from participating in many different markets following the GreatDepression. Each bill will be the same size(slightly larger than the American currency), but will have differentcolors associated with it. This isparticularly important since CyberCoast is located in such close proximityto one of the most stable and powerful currencies in the world--theAmerican dollar--as well as close to two large markets (Canada and theUnited States). This basic mission has not changed for the more than 8 years that the Fed has been in existence (McDonough, 1994). All of these monetary functions can be accomplished with coins andcurrency as well as with "virtual" money. A financial industry that is regulated enough to provideconsumer confidence without being so regulated as to scare off potentialcustomers would go a long way toward helping CyberCoast establish itself asa strong and independent financial center. Regulation of CyberCoast's thrift industry would start with theconcept that there be far fewer types of institutions than in the UnitedStates. McDonough, W. The Fed is a complicatedand intricate system that affects American consumers in nearly every aspectof their daily lives, from how much interest they pay on their mortgagesand consumer loans, to the amount of interest they receive at their localsavings institutions. Some countries, including Switzerland and Liechtenstein, have builtquite successful thrift industries by providing strong financial servicesto international customers. Since CyberCoast istrying to establish faith in its banking system, and since it expects tohave a stable political situation for the foreseeable future, having thegovernment agree to back deposits is one way to encourage investmentsdenominated in the mackey. Money is also the standard unit ofaccounting for expressing prices both in current and future terms. The president and Congress alsoselect many of the members of the Fed's most senior managers (the sixgovernors on the Federal Reserve Board). Economics. Similar to a private sectorboard of directors, these groups choose the organizations chief executiveofficer, the Chairman of the Federal Reserve Board (nominated by thepresident and confirmed by Congress). Although confidential banking services havecome under increased scrutiny in recent years as the role of financialinstitutions in laundering drug money and in financing the Nazi regime havebecome known, a strong financial industry can be a powerful inducement forbuilding an economy. The opportunity to work in aless regulated environment with a strong economic foundation might proveboth challenging enough and attractive enough to lure one of the other Fedmembers (perhaps New York) to the new CyberCoast central bank as itschairman. 572-584. New York: McGraw-Hill. Controlling the money supply of a nation is a critical task that fallsmost often to governments and central banks. The focal point of the bills will be majorgeographic and architectural features of the northwest since there is alack of dead statesmen to include on the currency at this time. (1994, August). The government controls the fiscal policy, while themonetary policy is controlled indirectly by the government through thecentral bank in most modern economies. The goal is to strike a balance so that there is enough moneyto stimulate the economy, but not so much that the economy overheats. An Independent central bank in ademocratic country. Money serves several different purposes in today's economies. Also, there are likely to be citizens of CyberCoast who donot maintain bank accounts and who prefer to operate entirely on a cashbasis; for these individuals alone (and for those who carry cash for smalltransactions), it is prudent for the new nation to have physical currencyfor its citizens. The most difficult challenge with regard to the central bank will befinding an individual to head the organization who can inspire confidencein the rest of the nation as well as the rest of the world. (1994, Spring). Journal of Money, Credit and Banking (26), pp. Since CyberCoast is technologically advanced intelecommunications and data processing, it could position itself as abanking center for the NAFTA countries as well as for other countries thathave a significant amount of high-technology activity within theireconomies. Firstand foremost, it is the common medium of exchange that eliminates thebarter system. The latter part of the twentiethcentury saw a significant increase in the number of cashless transactionsthat take place in everyday consumer experiences in the United States aswell as at the corporate level. Far more efficient than barter,money makes modern capitalism possible. However, CyberCoast would bewell advised to seek candidates from within the Federal Reserve system whomight welcome the chance to build a new economy using the wisdom they havegained at the relatively independent Fed. Although CyberCoast is known for being a high-technology nation withsophisticated consumers who are used to conducting cashless transactions,it would be unwise to try to eliminate currency altogether in the newnation. The Fed's outside directors and governanceboard (the board of directors within a private organization) are theCongress and the presidential administration. However,the CyberCoast Central Bank will operate in a manner similar to the FederalReserve, which will enable the government to back the monies placed inrecognized thrift institutions up to a certain amount. It is difficult for economists to agree on the course that monetarypolicy should take, and articles written by experts in the field andpublished concurrently have sometimes taken opposite stances (Goodfriend,1994). The roles filled by savings and loans and commercial banks haveblurred in recent years in the United States, and these two functions couldbe combined (or left to private industry to determine their institution'smission) in CyberCoast. Alan Greenspanwould be an ideal candidate, but it is unlikely that he would leave the Fedfor the less visible CyberCoast position. During the 199 s, Milton Friedman and James Buchanan argued thatmonetary policy was too tight, and based their view on the idea that M2growth was at the low end or beneath the low end of the Fed's target range. Certainly economies that have their own currency that is strongrelative to the rest of the world have advantages in building theireconomies since there is no translation risk to companies doing businesswithin the economy (Ito, 1999). Money is also a safe and tangible way to hold assets. Initially, however, the nation should learn valuablelessons from its neighbor and institute little regulation, the goal beingto provide enough regulation for guidance and safety, but not so much thatthe financial institutions of CyberCoast are hampered in their efforts toserve the needs of the new nation. Thuswhen someone makes a purchase for $1 today and agrees to pay $12 inthe future for that purchase, both parties understand the price as statedin monetary terms (Samuelson 1989). Such regulations are alsolikely to build confidence in the CyberCoast thrift industry. Although a nation formed in the Pacific Northwest can be assumedto be politically stable, it must conduct international trade and encourageits own citizens to have confidence in their currency. Despite these drawbacks to the central bank, and since CyberCoast willbe seeking to maintain a free and open economy, there will not be an overtmonetarist requirement placed on the central bank of CyberCoast. Federal Reserve Bank of New York Quarterly Review, pp.1-6. Ito, T. However, the government would be well advised toregulate minimum capital requirements and use the private banking system tocontrol the money supply in CyberCoast. During the 198 s and 199 s, the thrift industry went through aperiod of deregulation where many of these restrictions were removed.While total deregulation is probably unwise (as indicated by the savingsand loan crisis of the late 198 s in the United States), CyberCoast maywell want to have fewer rather than more regulations with regard to itsbanking system. (1989). He based his argument on the idea that narrow measures of money(such as M1 and the monetary base) grew well above their historicalaverages over the previous years. While many consumers still prefer to usedollars to transact their daily activities, cashless transactions, whetherthrough debit cards, credit cards or combinations (including toll roadtransponders) are increasingly common.
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