Central bank is a term used to describe an institution responsible for policies affecting a country’s money and credit supply. More specifically, central banks use monetary policy tools such as open market operations, discount window lending, and changes in reserve requirements to affect short-term interest rates and the monetary base (the money held by the public other than bank reserves) and to achieve important policy objectives.
The three main objectives of modern monetary policy, the first and The most important thing is price stability or the stability of the value of money. Today, that means sustainably low inflation. The second goal is a stable real economy, usually interpreted as high employment and high and sustainable economic growth. Another way to express it is to hope that monetary policy will promote the business cycle and compensate for economic shocks.
Origins of Central Banking
The history of central banking dates back to the 17th century, when the first institution to be recognized as a central bank was the Riksbank. It was established in 1668 as a joint-stock bank licensed to lend government funds and act as a clearinghouse for trade.
While these early central banks helped finance government debt, they were also private entities involved in banking activities, and because they held other banks’ deposits, they became bankers’ banks, facilitated interbank transactions, or provided other banking services, they It also becomes a repository for most banks in the banking system, as their large reserves and extensive network of correspondent banks allow them to be lenders of last resort in the face of financial crises. In other words, they stand ready to provide emergency cash to correspondent banks in economic distress.
Federal Reserve System
The Federal Reserve System belongs to the latter wave of central banks that emerged at the turn of the 20th century. These banks were created primarily to unify the various tools people use for money and provide financial stability, which is the gold standard for government management that most countries adhere to.
The gold standard, which prevailed until 1914, meant that every country based its currency on a fixed weight of gold. Central banks keep large reserves of gold to ensure that their banknotes can be exchanged for gold.When their reserves dwindle due to deficits or unfavorable local conditions, they raise the interest rate discount (the rate they charge on loans to other banks), which in doing so leads to hike Overall, this in turn attracts foreign investment, which brings more gold into the country.
Central banks adhere to the gold rule, which places the convertibility of gold above all other considerations, whereby the amount of money a bank can offer is limited to the value of the gold it holds as reserves, which in turn determines the prevailing price level, and because Price levels are relative to known commodities whose value is determined by market forces. In the long run, expectations about future price levels are also associated with them.
The Origins of Modern Central Banking Objectives
Prior to 1914, central banks paid little attention to maintaining the stability of the domestic economy. After World War I, things changed and they started worrying about employment, real activity, and price levels. In the 20’s the Fed started to focus on external stability (which meant monitoring gold reserves (because the US was still on the gold standard) and internal stability (which meant control over prices, production and employment), but as long as the gold standard prevailed, external goals prevailed .
Unfortunately, I lead Monetary Policy The Federal Reserve was in serious trouble in the 1920s and 30s because the bank followed a principle known as the true bill principle, which held that as long as the Reserve Bank only borrowed money, the amount of money needed by the economy would naturally be supplied when the banks provided self-paying When commercial paper was used as a security, it was a corollary that banks should not be allowed to lend to banks to finance stock market speculation, which explains why it followed a strict policy in 1928 to counteract the Wall Street boom. This policy led to the onset of the Great Depression in August 1929, and thereafter faced a series of banking panics from 1930 to 1933, in which the Reserve Bank failed to act as a lender of last resort, resulting in a collapse of the money supply followed by massive inflation Austerity and depression.
After the reorganization of the Federal Reserve System during the Great Depression, the Banking Acts of 1933 and 1935 clearly transferred power from the Reserve Bank to the Board of Governors, and the Federal Reserve was subordinated to the Treasury Department, and the pursuit of William McChesney Martin (William McChesney Martin) McChesney Martin, when the U.S. began working on a new world order, under the Bretton Woods Agreement of 1944, the U.S. and the U.S. dollar would reign supreme over the summit, where the U.S. dollar was pegged to gold, $35 an ounce, while other countries’ currencies are pegged to the dollar.
Why is the US dollar the world currency?
The 1944 Bretton Woods Agreement pushed the dollar to its current state. The developed countries of the world gathered in Bretton Woods to peg the exchange rates of all currencies to the dollar. At that time, the United States had the largest gold reserves. The agreement allowed other countries to trade in dollars Not gold to back their currency.
By the early 1970s, countries began exchanging gold for their dollar holdings. They need to fight inflation. Instead of letting Fort Knox drain all of its reserves, President Nixon de-pegged the dollar from gold. By then, the dollar had become the world’s primary reserve currency. But the decoupling of the dollar’s value from gold has led to stagflation.
For much of the past century, the dollar’s preeminent role in the global economy has been underpinned by the size and strength of the U.S. economy, its stability and openness to trade and capital flows, strong property rights and the rule of law, and its role as As a result, the depth and liquidity of U.S. financial markets is unrivaled, with a wealth of highly secure assets denominated in U.S. dollars.
The main function of money is that it is a store of value that can be saved and retrieved in the future without a significant loss of purchasing power. One measure of confidence in a currency as a store of value is its use in official foreign exchange reserves. The U.S. dollar accounts for about 60% of the world’s disclosed official foreign exchange reserves in 2021. That’s down from 71% in 2000, but still far outpaces all other currencies, including the euro (21%), the Japanese currency yen (6%), the British pound (5%) and the Chinese yuan (2%). Having said that, the declining share of the US dollar has been replaced by a variety of other currencies rather than one other, and while some countries have diversified their reserves to some extent over the past two decades, the US dollar remains by far the largest dominant reserve currency.
