Sunday, July 12, 2009

Duties and Structure of the Fed

Monetary policy is conducted by a central bank-a type of banker's bank. If the banks need to borrow money, they go to the central bank, just as when you need to borrow money, you go to a neighborhood bank. If there's a financial panic and a run on banks, the central bank is there to make loans to the banks until the panic goes away. Since its IOUs are cash, simply by issuing an IOU it can create money. It is this ability to create money that gives the central bank the power to control monetary policy. A central bank also serves as financial adviser to government. As is often the case with financial advisers, the government sometimes doesn't follow it.
In many countries, such as Great Britain, the central bank is a part of the government, just as this country's Department of the treasury and Department of commerce are part of the U.S. government. In the U.S. the central bank is not part of the government in the same way it is in some European countries.

No comments: