Money Creation and Monetary Policy

Topics: Monetary policy, Central bank, Inflation Pages: 4 (1231 words) Published: July 31, 2007
Creation of Money and Monetary Policy

In society, there are many interesting topics of discussion amongst individuals and groups, either in the private or public sector. However, there is one inescapable subject we all fall prey to, which is money. We have a love, hate relationship with money that dictates almost everything we do, or at least, strive to do. Money, a powerful force to reckon with, establishes our buying power, or lack there of, to the point where lifestyle choices might be endless or limited –creating a swinging door that can either be opened or closed for opportunities in all facets of life. But, do we ever come to a halt and ponder how money is created? More than likely the answer is no. Nonetheless, the time is now. The way society interacts with money now is much different from the original transactions of the early pioneers. Let's step back into the past to understand how money was created, and then leap to the present to explore current money generating methods. Purchases were settled with gold for traders in earlier times. The practicality of transporting gold became a huge burden and made the traders venerable to crime (i.e. attacks and robberies). Typically, the metal would have to be measure each time a transaction occurred for negotiation purposes. It became much easier for traders to "deposit their gold with goldsmiths, who would store it in vaults for a fee. On receiving a gold deposit, the goldsmith would issue a receipt to the depositor. Soon people were paying for goods with goldsmiths' receipts, which would serve as the first kind of paper money" (Brue and McConnell, 2004, p.253). This system reflects the infant stages of banking. The vaults housing the gold grew substantially with the general public's acceptance of the gold-receipt exchange process. The goldsmith's ensured a "100 percent reserve system" allowing full access to gold on demand based on receipt amount (Brue and McConnell, 2004, p.253)....

References: McConnell, C. & Brue, S. (2004), How Banks and Thrifts Create Money (16th ed.). ch. 14. New York: McGraw-Hill.
McConnell, C. & Brue, S. (2004), Monetary Policy (16th ed.). ch. 15. New York: McGraw-Hill. (2007). Retrieved June 19, 2007.
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