The Major Powers Of The Central Bank Finance Essay - Free Essay Example

There was a time when money did not exist. Long ago, people at a stage called subsistence economy produced only what they needed. Their needs were few but their methods of production were such that they spent most of their living hours in an unceasing battle for personal survival. They had no need for money. Thus, they were engaged in a Barter System. However, the Barter System became very deficient and it was thought wise to introduce money. But who would control the money in the economy, thus the Central Bank came in play. Statement of Problem Money has been seen as a stepping stone for many economies as it contributes to the standard of living and facilitated lots of transactions during the past few decades years. However, it needs to be properly supervised or controlled to make sure there is not too much or too little available within the economy. It is therefore important to investigate the major powers of the Central Bank (whom controls the money supply) so that there is a right amount in the economy. Review of Literature There are a number of alternative theories of how money is created, and generally emphasize endogenous money that money is created by internal workings of an economy, rather than external forces under whose rubric they thus fall. Chartalism, which holds that money is created by government deficit spending, and emphasizes (and advocates) fiat money. Chartalism is a monetary standard in which government-issued tokens are used as the unit of money. In such a system, fiat money is created by government spending. Taxation is employed to reclaim the money and control the total amount of fiat money in existence. Reclaiming most of this issued money via taxation is essential to maintaining its value in exchange. Modern Chartalism theory states that under a fiat money system, net currency is created by government through deficit spending. Because the issued currency is not tied to or backed by a commodity, currency can only be created when the government spends. Government may, or m ay not, ask for that currency back in taxes. The demand to hold and acquire this government issued currency is driven by taxes levied by the state which typically can only be paid in the state-issued fiat currency. (G.F. Knapp, 1920s) On the contrary, in the classical view, the central bank of a government creates money by purchasing government notes or bills through open market operations (this will be discussed later). Circuitist money theory, held by some post-Keynesians, who argues that money is created endogenously by the banking system, rather than exogenously by central bank lending. Further, they argue that money is not neutral. (Graziani 1989) Credit Theory of Money. This approach was founded by Joseph Schumpeter. Credit theory asserts the central role of banks as creators and allocators of money supply, and distinguishes between productive credit creation (allowing non-inflationary economic growth even at full employment, in the presence of technological progress ) and unproductive credit creation (resulting in inflation of either the consumer- or asset-price variety). Money supply remains one of the most controversial aspects of economics. Definition of Key Terms Central Bank The generic name given to a countrys primary monetary authority, such as the Federal Reserve System in the U.S. Usually has responsibility for issuing currency, administering monetary policy, holding member banks deposits, and facilitating the nations banking industry. The Money Supply is liquid assets held by individuals and banks. The money supply includes coins, currency, and demand deposits (checking accounts) or Money supply (monetary aggregates, money stock), a macroeconomic concept, is the quantity of money available within the economy to purchase goods, services, and securities. Monetary policy is the process by which the government, central bank, or monetary authority manages the money supply to achieve specific goals such constraining inflation, maintaining an exchange rate achieving full employment or economic growth. Monetarism is a set of views concerning the determination of national income and monetary economics. It focuses on the supply an d demand for money as the primary means by which economic activity is regulated. Monetary theory focuses on money supply and on inflation as an effect of the supply of money being larger than the demand for money. Open Market Operations are the buying or selling of Government bonds by the Central Bank in the open market. If the Central Bank were to buy bonds, the effect would be to expand the money supply and hence lower the interest rates; the opposite is true if bonds are sold. Reserve Requirements are a percentage of commercial banks, and other depository institutions, demand deposit liabilities (i.e. checking accounts) that must be kept on deposit at the Central Bank as a requirement of Banking Regulations. Though seldom used, this percentage may be changed by the Central Bank at any time, thereby affecting the money supply and credit conditions. If the reserve requirement percentage is increased, this would reduce the money supply by requiring a larger percentage of the banks, and depository institutions, demand deposits to be held by the Central Bank, thus taking them out of supply. As a result, an increase in reserve requirements would increase interest rates, as less currency is available to borrowers. This type of action is only performed occasional as it affects money supply in a major way. Analysis Money can be defined as anything that is generally accepted as a medium of exchange and settlement of debt. Functions of Money Medium of Exchange: anything that is readily acceptable as payment. Unit of Account: serves as a unit of account to help us compare the relative value of goods. Store of Value: a way to keep some of our wealth in a readily spendable form for future needs. Method of Deferred Payment: Allows people to delay paying for goods or settling debt, even though goods or services are being provide immediately. Definition of Money Supply The following definitions of money supply are based on U.S. definitions. Types of Money They are two types of money:- Commodity Money: something that performs the function of money and has alternative, nonmonetary uses e.g. gold, silver, cigarettes. Fiat Money: something that serves as money but has no other important uses e.g. coins, currency, check deposits. Money in an Economy Money Stock is th e quantity of money circulating in the economy. The different ways of measuring the money stock in an economy are: M1: Currency (coins and paper money) in the hands of the public + all demand deposits in deposit taking financial institutions + travelers checks + other checkable deposits M2: M1 + savings deposits + small time deposits (less than $100,00) + money market deposit accounts + other short term investments. M3: M2 + large time deposits (more than $100,000) M2 + M3 are considered near or quasi money since they cannot be easily used to purchase a good or service. NB: In the US is regarded as the narrowest form of money supply. The defining characteristic of this form of money is that it can be easily used to directly purchased goods and services. In England, the narrowest form of money supply is defined as M0 while the broadest is M4. M0: notes and coins in circulation, plus banks balance at the Bank of England. M2: M0 + residents sterling retail deposits with banks, building societies and National Savings. M4: M2+ both time and sight with banks and building societies. M4c: M4 + all foreign currency deposits held in UK banks and building societies by the UK non- bank private sector. In Guyana, the money supply is divided basically into two categories i.e. narrow and quasi money. Narrow money can be seen as M1 while narrow and quasi money together makeup M2 (broad money). Central Bank A countrys central bank is often seen as the bankers bank and is supposed to be independent of the government. The Central Bank is importan t because of the following functions: issuing currency setting reserve requirements lending money to banks provides for checking collection or clearing between banks fiscal agent to the government supervision of financial institutions controlling the money supply The major powers of the Central Bank that enable it to affect the Money Supply are:- Required reserve rate is lowered: The Central Bank can lower required reserve rate which raises the multiplier effect of high powered money (cash). The cash stays in the banks and each dollar can support more loans/demand deposits. For example, the required reserves went from 20% to 10 %, bank ACM would only need to hold $10,000 in reserves for the initial injection of $100,000. The other $90,000 would be loaned out so at each stage in the multiplier chain, the banks would be loaning out more funds and the eventual increase in the money supply would be larger. Discount interest rate decreases: The Central Bank can lower the discount rate and lower the costs for banks holding low excess reserves which will lower the excess reserve rate. If the Central Bank lowers the discount rate, or sets a lower federal funds target, this can be accomplished if the Central Bank injects funds into the system which will drive down the price of those funds interest rates Publics holding of cash changes: The Central Bank can raise confidence in banking system which will lower publics desire for holding cash. If you look at the high-powered money the Central Bank can inject into the system, a dollar in the hands of an individual is simply a dollar of money supply. A dollar in reserves at the banks, however, can support some multiple expansions of checking accounts. For example, when the required reserve rate was 10%, the $100,000 cash injection the system ultimately resulted in a $500,000 increase in checking account balances. Thus, if the Central Bank can move dollars from peoples pockets to banks, this will increase the money supply. In the Great Depression, one of the real problems was people lost confidence in the banks and took their cash out of the banks, a pattern that caused the money supply to decrease. When people want cash, the reserves in the banks fall which creates a bigger drop in demand deposits. The result is a net decrease in the money supply. For this reason you would expect every Christmas season the money supply would decrease as consumers want to hold more cash. To offset this, the Central Bank will need to get more cash into the system. Open market purchases: this is the Central Banks primary tool of monetary policy. The Central Bank can buy or sell government securities. For example, the Central Bank will contact its broker and announce it wants to buy $100,000 of government securities. The increase of $100,000 cash into the system will result in an increase in the money supply of $500,000. If the Central Bank wants to increase the money supply it will buy government securities, while if it wants to decrease the money supply it will sell government securities. The supply of money can only increase if the money is first printed by the issuer of money, usually the government central bank. The central bank prints coins and bills and electronic money (as mentioned in the functions of the Central Bank). Conclusion The researcher has concluded that the Central bank plays a significant role within the economy in controlling the supply of money. If the Money Supply is not properly attain to recessions and inflations will occur which will hinder the economic activities that the government is engaged. Furthermore, the major powers of the Central Bank, which were mention earlier, are important in regulating the supply of money.

Planting An Empire By Russo, Jean Burrell, J. Elliott Russo - 1375 Words

Planting An Empire By Russo, Jean Burrell, J. Elliott Russo (Book Review Sample) Content: BOOK REVIEW: PLANTING AN EMPIREName:Class:Date:IntroductionThe book Planting an Empire looks into the history that defines the economic and social activities of the Chesapeake region. The narrative tells a story of two areas that were similar yet distinct for settlement and interaction during the colonial era. Before the American Revolution, Maryland and Virginia, connected by the Chesapeake Bay, formed a politically prominent and prosperous region in North America. However, irrespective of the similarities in emphasizing on tobacco farming, having the same soils and climate, as well as using the free labor provided by slaves to drive their economies, these sister colonies took deviating paths in their social and economic development.[Russo, Jean Burrell, and J. Elliott Russo. 2012.Planting an empire: the early Chesapeake in British North America. Baltimore: Johns Hopkins University Press.] Thesis InterpretationThe authors of the book describe the colonial laws as one s that brutally undermined the lives of all blacks, both free and enslaved; and portrayed the region as a slavery society that was defined by violence and inherent discrimination.They also maintain that white people who were poor and did not own slaves considered themselves to have many similarities with blacks than with men who had acquired wealth from slavery. Therefore, as much as the book gives an insight of how important slaves were to the economic development of Chesapeake during the colonial period; the authors failed to explore the human aspect of slavery. Slaves might have appeared to be nothing but livestock in the presence of colonialists, and that is precisely how the book portrays them.[Morris, Ian.The measure of civilization: how social development decides the fate of nations. Princeton University Press, 2013.] Purpose and Target Audience the BookThe authors of Planting an Empire - Jean B. Russo and J. Elliott Russo evaluate the history shared by the two regions. They do not only look into the political differences and economic disparities that alienated Maryland and Virginia from each other, but also the role tobacco played in the colonies, their uncertain origins and how a settler society was developed. By keeping track of the Chesapeake regions history for more than one hundred and fifty years, Planting an Empire discusses key regional events and significant developments that were common to both colonies in and in-depth, and clear prose. These events and developments include the French and Indian war, Bacons Rebellion in Virginia, and Plundering Time in Maryland.From the book, it is evident how the regional conflicts and internal differences that arose in the 17th century paved the way for a more lucid regional culture in the 18th century that was driven by a common dedication to increasing economic maturity through enslaved labor. Therefore, the book does not only touch on government and its officials, and wealthy plantation owners; but revo lves around all the people that took part in establishing an empire in the Chesapeake Bay region. These included non-English immigrants, Native Americans, both enslaved and free blacks, and poor planters and women.[Ibid.] From time to time, the book chiefly focuses on economics, but also provides background and instances that balance ships manifests and estate lists. This balance makes the reader understand how economic decisions not only had an impact on life ant a personal level but also at local and macroscopic levels. However, it is regrettable that the aspect of slavery is looked at as an empowering economic activity and the authors tend to presume that the meaning of freedom is static and universal.There is no other book or written material that gives a broad perspective of the history of Virginia and Maryland colonies and the places they held in the British empire like Planting an Empire does. The authors provide a terse historical summary ofthe Chesapeake Bay region from the time the English settlement started until the time when the colonial period was over. It is for this reason that the book will be a good read for undergraduate students and more helpful to tutor in updating their lectures.Organization and CoherenceThe book Planting an Empire is well researched and exhaustively provides a historical account of the events that shaped the Chesapeake region; ranging from the development of Maryland and Virginia as sister colonies in the 1600s to the English settlement and early European exploration of the of the region. The narrative covers the period between the start of exploration until the mid-1700s, during the French and Indian war. The major argument that Jean and Elliot Russo bring forth is that if the Chesapeake colonies are assessed in their first century of existence, then it can be concluded that the entire white society looked at enslaved labor as a way to creating substantial wealth. The central focus of the book is theirrefutable wealth, how it was created and then transferred, and the consequences that followed.[Ibid.] Ranging from the role played by English investment companies in the establishment of settlements in Maryland and Virginia and the emergence of the region as a tobacco colony to the diversification, and westward expansion, the theme of economics is prominent all through the book. The topic of economics links the Chesapeake region to the Caribbean where the colonial masters exported commodities such as wheat and timber; and from which most of the first enslaved blacks arrived in the Northern American colonies and not directly from Africa. Complex cultural changes were createdas social stability was established in the colonies. These changes allowed elite families to amass even more resources, some of which were in the form of slaves. Since it was difficult for small planters to acquire slaves, it became a trait for a sophisticated life for plantation owners not only to own slaves, who were tasked with different responsibilities in managing plantation life both at home and in the fields.[Tiryakian, Edward A. "Civilization in the Global Era."Social Theory and Regional Studies in the Global Age(2014): 91.] The authors of the book describe the colonial laws as ones that brutally undermined the lives of all blacks, both free and enslaved; and portrayed the region as a slavery society that was defined by violence and inherent discrimination.They also maintain that white people who were poor and did not own slaves considered themselves to have many similarities with blacks than with men who had acquired wealth from slavery. Therefore, as much as the book gives an insight of how important slaves were to the economic development of Chesapeake during the colonial period; the authors failed to explore the human aspect of slavery. Slaves might have appeared to be nothing but livestock in the presence of colonialists, and that is precisely how the book portrays them.[Morris, Ian.The measure o f civilization: how social development decides the fate of nations. Princeton University Press, 2013.] Authors Research and StyleIn the last chapter of the book, the authors go into considerable detail concerning the lives of people of color during the colonial period in Chesapeake. Jean and Elliot Russo g...