Money supply
Main article Money supply
The money supply is the amount of money within a specific economy available for purchasing goods or services. The supply in the US is usually considered as four escalating categories M M M and M. The categories grow in size with M representing all forms of money including credit and M being just base money coins bills and central bank deposits. M is also money that can satisfy private banks reserve requirements. In the US the Federal Reserve is responsible for controlling the money supply while in the Euro area the respective institution is the European Central Bank. Other central banks with significant impact on global finances are the Bank of Japan Peoples Bank of China and the Bank of England.
When gold is used as money the money supply can grow in either of two ways. First the money supply can increase as the amount of gold increases by new gold mining at about per year but it can also increase more during periods of gold rushes and discoveries such as when Columbus discovered the new world and brought gold back to Spain or when gold was discovered in California in . This kind of increase helps debtors and causes inflation as the value of gold goes down. Second the money supply can increase when the value of gold goes up. This kind of increase in the value of gold helps savers and creditors and is called deflation where items for sale are less expensive in terms of gold. Deflation was the more typical situation for over a century when gold and credit money backed by gold were used as money in the US fromto .
Monetary policy
Main article Monetary policy
Monetary policy is the process by which a government central bank or monetary authority manages the money supply to achieve specific goals. Usually the goal of monetary policy is to accommodate economic growth in an environment of stable prices. For example it is clearly stated in the Federal Reserve Act that the Board of Governors and the Federal Open Market Committee should seek “to promote effectively the goals of maximum employment stable prices and moderate longterm interest rates.”
A failed monetary policy can have significant detrimental effects on an economy and the society that depends on it. These include hyperinflation stagflation recession high unemployment shortages of imported goods inability to export goods and even total monetary collapse and the adoption of a much less efficient barter economy. This happened in Russia for instance after the fall of the Soviet Union.
Governments and central banks have taken both regulatory and free market approaches to monetary policy. Some of the tools used to control the money supply include
