Controlling Money Supply

Controlling the money supply of a nation is a critical task that falls most often to governments and central banks. If there is too much money in circulation, inflation results; too little money, and the economy contracts. The goal is to strike a balance so that there is enough money to stimulate the economy, but not so much that the economy overheats. In the United States, money supply is controlled through fiscal (tax) policy and monetary policy. The government controls the fiscal policy, while the monetary policy is controlled indirectly by the government through the central bank in most modern economies.

Money serves several different purposes in today's economies. First and foremost, it is the common medium of exchange that eliminates the barter system. Instead of trading apples for oranges (or guns for butter), money provides a single exchange mechanism for all transactions within an economy. Money can be used to pay for time, products, services, and all other transactions (including financial transactions such as paying interest) that take place in an economy. Far more efficient than barter, money makes modern capitalism possible. Money is also the standard unit of accounting for expressing prices both in current and future terms. Thus when someone makes a purchase for $1000 today and agrees to pay $1200 in the future for that purchase, both parties understand the price as stated in monetary terms (Samuelson 1989).

Money is also a safe and tangible way to

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hampered in their efforts to serve the needs of the new nation. As an example, financial institutions in the United States were prohibited from participating in many different markets following the Great Depression. Thus savings and loans served different customers than commercial banks, and credit unions served yet different customers entirely. During the 1980s and 1990s, the thrift industry went through a period of deregulation where many of these restrictions were removed. While total deregulation is probably unwise (as indicated by the savings and loan crisis of the late 1980s in the United States), CyberCoast may well want to have fewer rather than more regulations with regard to its banking system. Regulation of CyberCoast's thrift industry would start with the concept that there be far fewer types of institutions than in the United States. The roles filled by savings and loans and commercial banks have blurred in recent years in the United States, and these two functions could be combined (or left to private industry to determine their institution's mission) in CyberCoast. However, the government would be well advised to regulate minimum capital requirements and use the private banking system to control the money su

Category: Economics - C