Monetary Policy

MONETARY POLICY

2005

INTRODUCTION

Monetary Policy refers to the control of the rate of monetary expansion The Economy is impacted by monetary policy actions as they flow through the financial market channels . Specifically these channels are interest rates and exchange rates on aggregate demand The Monetary Policy of the United States of America is managed by the Federal Reserve which is otherwise referred to as the Central Bank of the United States . The Federal Reserve can trace its roots back to 1907 when the KnickerBocker Trust Company of New York

failed . It was J .P Morgan that got together a team of fellow bankers who banded together to provide backing for New York 's unstable banks

With such a show of economic power by an individual , it became obvious to Congress that a Central Bank was required . In 1913 the Federal Reserve Act was passed it had taken six years to work out interests from the eastern states and autonomous monetary reformers . Twelve Federal Reserve districts were formed with the New York district emerging the most powerful due to its economic might .In the 1923s there was a glut of European gold flooding the US . The New York bank head , Benjamin Story , was able to deal with the excess by selling securities from the Federal Reserve 's portfolio . By 1928 , the Federal Reserve (also known as the Fed ) could not stabilize prices and low rates encouraged members to use Fed loans for stock speculation Since the Federal Reserve was unable to check the boom , the 1929 crash was inevitable

By 1932 , the Fed had overcome a larger portion of it 's fear of inflation . It went into the market to buy bonds , thereby substituting cash for securities . The line of thought was that with reserves in excess of requirements , they would be able to expand their loans (and thereby , deposits and money supply . Unfortunately , the result of this action was that banks simply sat on the cash and were unable to counteract the Depression . Borrowers would not borrow and bankers would not lend . At that time , the monetary policy was likened to a string you could pull it but you could not shove it at all

In 1937 , the Federal Reserve decided to apply a restrictive monetary policy and combine this with a restrictive budgetary policy . The reserve requirements of member banks were raised . As a result , bank stiffened interest rates and reduced outstanding loans . This resulted in a sharply increased recession in a time of depression . This was an error and one that caused the Federal Reserve to desist from taking any other action for 15 years . The lesson learned was that it was possible to make reserves available but could not cause them to be borrowed . The creation and use of money had to be made obligatory and not permissive

In March of 1951 , an accord was reached between the Treasury and the Federal Reserve . By cultivating the help of the Congress , the Federal Reserve System no longer...