What is the Monetary System?

The monetary system of a country refers to the system in which a government provides money in the economy of the country. In the modern-day monetary system, usually it contains the National Treasury, the mint where the notes are being printed. The Central bank and the commercial banks regulate the money supply in the economy of a country.

The United States government in the year 1775 was vested with the power of issuing dollar during the Revolutionary War by the Continental Congress. Since then, it is known that America was a group of colonies from different parts of the world. The word dollar was already known to the people, which was used in Spain as Spanish dollar, it has also been used commonly and circulated in the colonies of America.

Therefore, the new paper money which was issued during the time of the Revolutionary War was ordered by the Continental Congress came to be known as continental throughout the colonies residing in America.

As the revolutionary war took over the colonies, the value of the continental currency that came into existence started depreciating. In the year 1792 the United states government put forward dumb monetary system of money supply which mainly concentrated on the value of the metals, primarily on gold and silver that was later used to bring out the value of a standard dollar.

The silver coins and the gold coins were known as the full-bodied money which had a face value that was equal to the value of the element that is the gold or the silver.

The Federal Reserve Bank or the Central Bank of the United states had the concept of the money system in terms of paper money in two forms.

Representative Full-bodied Money

Representative full-bodied money is the paper currency or the paper money which is having a face value that got established from the amount of precious metal which is gold and silver that is being used in making that money. Later, the people of United States avoided the representative full-bodied money and used Fiat money.

Fiat Money

Fiat money is the paper currency, or the paper note that is issued by the Federal Reserve Bank or the central bank in which the value of the money or the value of the paper currency is being vested by the Federal Reserve itself.

The Federal Reserve Bank or the Central Bank of America has the sole authority to distribute, process and receive money through various kinds of depository institutions.

How did the Monetary System in the United States come into Existence?

The existence of the monetary system in the United states came into existence when globalization and its crisis had hit the country. The bank was alarmed for the matter of fact that there was inefficient regulation of the financial institutions that existed in America during 1907. This was the situation when the liquidity crunch of the financial institution ultimately affected the entire economy of America. Such conditions were a consequence of the occasional mobility of capital to the vehicles of the harvested crop from the Midwest to the East West and two Europe as well. This resulted in capital outflow which ultimately, they appreciated the value of the home currency of America which also brought major changes in the foreign markets. These situations also badly affected the gold and silver certificate and ultimately resulted in a liquidity crisis of all kinds of financial institutions that existed in America.

It was high time for the country to focus on the banking system. The Central bank and the monetary policy can actually uplift the economy and compensate for all the loss. Hence, the National Bank of America which is also known as the Central Bank of America now issued Federal Reserve notes which acted similarly as dollars to solve the issue of the liquidity crisis.

Globalization played a major role in the development of the United states monetary system. Globalization means that the economy of a country should speed up for the purpose of trade, exchange goods and services through the process of export and import this helps different countries and the home country itself to have development. America started globalization long time ago hence, the price of the goods has decreased and people tend to invest money in other countries where the interest rate is high. People do not invest money in America due to the liquidity crisis. The value of the currency has depreciated which has led to a reduced amount of interest rate compared to the world’s interest rate.

Key Takeaways

The objective of the Central banking system of America was to embrace certain monetary policies which will not only boost the economy but also restrict the cash outflows. This required to increase the Federal Reserve notes supply. After this change there will be excess money supply in the American economy and this will lead to increase in the prices of goods, services in the economy and the people will be rich to spend in the home country itself. This will boost the aggregate demand in America that will ultimately bring the country out of this liquidity crisis.

The second option to America is to impose tariffs and quotas on its exports and imports. Since the value of the dollar has depreciated earlier, the home goods or the local goods have become more expensive which resulted in people to demand more of the imported goods which had cost them less. Therefore, it was important for America to impose certain tariffs and quotas to manage the import export crisis. Once the import is restricted there will be less fund or money outflow from the economy. There will be more money supply and hence, the interest rate will also increase as a result of which the interest rate of America will go above the world interest rate.

This will attract investors to invest their money in America which will further increase the money supply in America and leads towards its growth.

Context and Applications

This topic is significant in the professional exams for both undergraduate and graduate courses, especially for

• BBA
• B.COM
• M.COM