Banks and Finance

The quantity of money in any economy is central to determining the state of that economy. It affects the level of prices, the rate of economic growth and the level of employment.

A nation's money supply is based on either the production of a commodity or governmental fiat. Commodity money is based on valuable metals: gold or silver. Fiat money, on the other hand, does not have intrinsic value. Today many countries are on a fiat money system, in which the government through its central bank controls the money supply.

There are national banks and commerce banks. In the USA the Federal Reserve System is an independent U.S. government agency. It was established by Congress in 1913 to strengthen the supervision of the banking system. Its most important function is to manage the country's supply of money and credit. All commercial banks are required by law to be members of the Federal Reserve System. A bank that is a member of Federal Reserve System uses the Reserve Bank in the same way that a person uses bank in his or her community.

The Federal Reserve System is administered by the Federal Reserve Board of Governors, a group of seven individuals appointed by the President of the USA for 14-year term and are responsible to Congress. But the Governors are, by law, independent of political pressure from either the Congress or President.

Money in the U.S. consists of coins and paper currency. According to federal law, only the U.S. Treasure and the Federal Reserve System can issue U.S. currency.

When the money supply increases, people have more money to spend, and demand for goods and services increases. As demand.increases, business hire more workers to increase output. This is an economic growth rule if prices rise continuously, inflation results.