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A nation’s money supply is based
on either the production of
a commodity or governmental fiat. Commodity money is based
on valuable metals: gold or silver. Fiat money, on the other hand,
does not have intrinsic value. To day many countries are on a fiat
money system, in which the government
through its central bank
controls the money supply.
There are national banks and commerce banks. In the USA
the Federal Reserve System is an independent U.S. government
agency. It was established by Congress in 1913 to strengthen the
supervision of the banking system. Its most
important function is to
manage the country’s supply of money and credit. All commercial
banks are required by law to be members of the Federal Reserve
System. A bank that is a member of Federal Reserve System uses
the Reserve Bank in the same way that
a person uses a bank in his
or her community.
The Federal Reserve System is administered by the Federal
Reserve Board of Governors, a group of seven individuals appointed
by the President of the USA for 14-year
term and is responsible to
Congress. But the Governors are, by law, independent of political
pressure from either the Congress or President.
Money in the U.S. consists of coins and paper currency.
According to federal law, only the U.S.
Treasure and the Federal
Reserve System can issue U.S. currency.
When the money supply increases, people have more money
to spend, and demand for goods and services increases. As demand
increases, business hires more workers to increase output. This is
an economic growth rule but
if prices raise continuously, inflation
results.
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