Question

Write a paper that addresses how the Federal Reserve Bank creates currency. The Fed finances the debt of the federal government by loaning money to the federal government. The currency created is fiat currency since it not backed by any assets. The currency is backed only by the full faith and credit of the U.S.

Requirements: 500 words minimum,

Answer 1

Federal Reserve Bank is the Central Bank of US which was established on 1913,Dec 23. It was passed by the Federal Reserve Act. The Bank was formed as a result of financial crisis. That financial crisis leads to the need of a controlling system for the monetary system. Thus Federal Reserve Bank arises and helps to reduce the financial crisis. Later, in the years of 1930 and 2000, events of the Great Depression and the Great Recession occurred respectively. This increases the duties as well as responsibilities of Federal Reserve Bank.

Headquarters of Federal Reserve Bank is Eccles Building, located in Washington DC of US. Chairman of Federal Reserve Bank is Jerome Powell. Its reserve requirements are 0-10% and bank rate is 2.50%. It came under the jurisdiction of Federal Government of US. Federal open market committee is the child agency of Federal Reserve Bank. Federal Reserve System is governed by Board of Governors and 12 Regional Federal Reserve Banks. The US congress formulated three objectives of monetary policy in the Federal Reserve Act :

1. Employment maximization
2. Price stabilization
3. Diminishing long term interest rates

  The monetary policy decisions of Federal Reserve Bank do not need an approval of President or any Government authorized personnel. Federal Reserve Bank controls private banks and maintains a balance between Government and private banks. Board of Governors are appointed by President of US and should be confirmed by Senate for a term period of 14 years. Twelve Regional Federal Reserve Banks are located in San-Francisco, Chicago, Atlanta, New York, Kansas city, Richmond, Boston, Minneapolis, Philadelphia, St. Louis, Dallas and Cleveland. Financial Reporting standards of Federal Reserve Bank depends on the Financial Accounting Manual and Cost Accounting Standards depends on the Planning and Control System Manual.

It is the economic institution which influence the world. The main duty of Federal Reserve Bank is regulation of the whole of outstanding dollar and dollar substitute supply. Federal Reserve Bank is duly responsible for the creation of billions of dollars. Majority of US dollars is debited digitally and directly credited to the banks, even though certain dollar printing machines still occur in the US treasury department. The actual creation of money occurs after the banks give loans to the economy.

Federal open market committee and as well as the advisers conduct meetings in order to evaluate the money supply of US and the common economic conditions. If they think there is need for new money creations, at that time Federal Reserve Bank aims at a specific level of money booster and also to establishing related policies.

Money Creation Mechanism :-

During past times, Central Bank :

• creates money physically in the form of paper notes and metal coins established along with anti-fraud devices.
• After that, the bank will issue the money to the public.

But now a days Federal Reserve Bank became technologically highly innovative. Now the opinion of Federal Reserve Bank is that there is no need of physical money as public can use :

• debit cards
• credit cards
• checks
• online transactions
• bank transfers etc.

Hence Federal Reserve Bank abstracts new liquifiable accounts like US treasury and debit to prevailing bank reserves. Usually, banks receive that money by selling certain financial assets. Hence now money creation by Federal Reserve Bank is more cheaper and inflationary.