WHAT ARE CENTRAL BANKS?
By Timothy McMahon, editor InflationData.com
A central bank, also known as a reserve bank, is an institution designed to serve several various and often conflicting functions. The primary reason that central banks were originally created was to be the bank for the government. Kings liked to spend money whether it was to wage war or build palaces they needed financing. So, they created a Central Bank to handle that function.
In the United States the Central Bank is called the Federal Reserve or FED. In the U.K. it is the Bank of England (BoE) and in Japan it is called the Bank of Japan (BoJ).
pixabay.com
However, over the years other functions have been added to the basic “banker to the government” role. Beginning in 1977 Congress imposed a “Dual Mandate” on the Fed requiring both price stability and full employment. These two mandates are polar opposites however, so the FED has a bit of a balancing act to maintain the best balance possible.
Other functions of the Central Bank include:
pixabay.com
Act as a Banker to the Government
The FED and other Central Banks still act as the Banker for the Government lending it money to wage wars or create social welfare programs. When the government runs a deficit, it has to get the money somewhere and this is achieved through a complex money shuffle done by the Federal Reserve.
Implement Monetary Policy
“Monetary policy” is the methods in which the Central Bank controls inflation, money supply, economic growth, price stability, and liquidity.
pixabay.com
Central banks use a variety of different methods to achieve these goals. Things like modifying interest rates, regulating foreign exchange rates, and changing the amount of money banks are required to maintain as reserves. They can also increase or decrease the supply of government bonds by either being a net buyer or seller of the bonds. This can increase or decrease the amount of money in the banking system.
In “Operation Twist” the U.S. FED was neither increasing or decreasing the money supply. Instead they wanted to fight an inverted yield curve. They did this by buying long-term bonds and selling short-term bonds. In an effort to decrease short-term interest rates and increase long-term rates.
pixabay.com
Foreign Exchange Rates
Up until 1992, most Central Banks fixed their exchange rate against foreign currencies by law but beginning in 1992 most Central Banks abandoned that practice in favor of allowing the rate to be determined by the free market on FOREX exchanges. Some Central Banks like the Central Bank of China, however, still set their Exchange rate by fiat. This “arbitrary” setting can cause adverse forces in the economy.
pixabay.com
Act as a Banker to Banks
As the banker to banks the FED has a variety of functions. It sets interest rates through its FED Funds rate which is the rate that banks can borrow each other’s “excess reserves” that are actually held by the FED itself.
The FED is also the “Lender of Last Resort” which means that if a bank can’t borrow from other banks it can always borrow directly from the FED itself. This borrowing is done at the “discount Rate” which is also set by the FED but is higher than the FED Funds Rate.
Some Central Banks also provide deposit insurance to help maintain confidence in the banking system and prevent “runs” on the banks. Although the U.S. FED doesn’t provide this type of insurance to the U.S. banking system there is another independent federal agency insuring deposits in U.S. banks called the Federal Deposit Insurance Corporation (FDIC).
One disadvantage of policies like Lender of Last Resort and Federal Deposit Insurance is that banks can see this as a license to take more risk and thus create instability in the entire banking system as we saw in 2008. For this reason, the FED also has a regulatory role.
pixabay.com
Regulate the Financial System
The FED requires its banks to maintain a certain percentage of their funds in reserve. In other words it must not lend out 100% of its money. And the FED doesn’t just take a bank’s word that they have these reserves. Instead, the banks must keep their required reserves in the FED’s bank. The bank gets no interest on these reserves, so if it has any excess over the required minimum it will loan that to another bank with a shortfall. This lending is done at a rate very close to the FED’s recommended “FED Funds Rate”.
Different countries use different methods to monitor and control their banking sector. The U.S. uses several different agencies. The three main 3 federal agencies are, the Federal Deposit Insurance Corporation, the Federal Reserve Board, and the Office of the Comptroller of the Currency plus others on the state and the private level.
pixabay.com
Source: Inflation Data
______________________________________________________
If you wish to contact the author of any reader submitted guest post, you can give us an email at UniversalOm432Hz@gmail.com and we'll forward your request to the author.
______________________________________________________
All articles, videos, and images posted on Dinar Chronicles were submitted by readers and/or handpicked by the site itself for informational and/or entertainment purposes.
Dinar Chronicles is not a registered investment adviser, broker dealer, banker or currency dealer and as such, no information on the website should be construed as investment advice. We do not support, represent or guarantee the completeness, truthfulness, accuracy, or reliability of any content or communications posted on this site. Information posted on this site may or may not be fictitious. We do not intend to and are not providing financial, legal, tax, political or any other advice to readers of this website.
Copyright © 2019 Dinar Chronicles
By Timothy McMahon, editor InflationData.com
A central bank, also known as a reserve bank, is an institution designed to serve several various and often conflicting functions. The primary reason that central banks were originally created was to be the bank for the government. Kings liked to spend money whether it was to wage war or build palaces they needed financing. So, they created a Central Bank to handle that function.
In the United States the Central Bank is called the Federal Reserve or FED. In the U.K. it is the Bank of England (BoE) and in Japan it is called the Bank of Japan (BoJ).
pixabay.com
However, over the years other functions have been added to the basic “banker to the government” role. Beginning in 1977 Congress imposed a “Dual Mandate” on the Fed requiring both price stability and full employment. These two mandates are polar opposites however, so the FED has a bit of a balancing act to maintain the best balance possible.
Other functions of the Central Bank include:
- Implement Monetary Policy
- Act as a banker to Banks
- Regulate the Financial System
pixabay.com
Act as a Banker to the Government
The FED and other Central Banks still act as the Banker for the Government lending it money to wage wars or create social welfare programs. When the government runs a deficit, it has to get the money somewhere and this is achieved through a complex money shuffle done by the Federal Reserve.
Implement Monetary Policy
“Monetary policy” is the methods in which the Central Bank controls inflation, money supply, economic growth, price stability, and liquidity.
pixabay.com
Central banks use a variety of different methods to achieve these goals. Things like modifying interest rates, regulating foreign exchange rates, and changing the amount of money banks are required to maintain as reserves. They can also increase or decrease the supply of government bonds by either being a net buyer or seller of the bonds. This can increase or decrease the amount of money in the banking system.
In “Operation Twist” the U.S. FED was neither increasing or decreasing the money supply. Instead they wanted to fight an inverted yield curve. They did this by buying long-term bonds and selling short-term bonds. In an effort to decrease short-term interest rates and increase long-term rates.
pixabay.com
Foreign Exchange Rates
Up until 1992, most Central Banks fixed their exchange rate against foreign currencies by law but beginning in 1992 most Central Banks abandoned that practice in favor of allowing the rate to be determined by the free market on FOREX exchanges. Some Central Banks like the Central Bank of China, however, still set their Exchange rate by fiat. This “arbitrary” setting can cause adverse forces in the economy.
pixabay.com
Act as a Banker to Banks
As the banker to banks the FED has a variety of functions. It sets interest rates through its FED Funds rate which is the rate that banks can borrow each other’s “excess reserves” that are actually held by the FED itself.
The FED is also the “Lender of Last Resort” which means that if a bank can’t borrow from other banks it can always borrow directly from the FED itself. This borrowing is done at the “discount Rate” which is also set by the FED but is higher than the FED Funds Rate.
Some Central Banks also provide deposit insurance to help maintain confidence in the banking system and prevent “runs” on the banks. Although the U.S. FED doesn’t provide this type of insurance to the U.S. banking system there is another independent federal agency insuring deposits in U.S. banks called the Federal Deposit Insurance Corporation (FDIC).
One disadvantage of policies like Lender of Last Resort and Federal Deposit Insurance is that banks can see this as a license to take more risk and thus create instability in the entire banking system as we saw in 2008. For this reason, the FED also has a regulatory role.
pixabay.com
Regulate the Financial System
The FED requires its banks to maintain a certain percentage of their funds in reserve. In other words it must not lend out 100% of its money. And the FED doesn’t just take a bank’s word that they have these reserves. Instead, the banks must keep their required reserves in the FED’s bank. The bank gets no interest on these reserves, so if it has any excess over the required minimum it will loan that to another bank with a shortfall. This lending is done at a rate very close to the FED’s recommended “FED Funds Rate”.
Different countries use different methods to monitor and control their banking sector. The U.S. uses several different agencies. The three main 3 federal agencies are, the Federal Deposit Insurance Corporation, the Federal Reserve Board, and the Office of the Comptroller of the Currency plus others on the state and the private level.
pixabay.com
Source: Inflation Data
______________________________________________________
If you wish to contact the author of any reader submitted guest post, you can give us an email at UniversalOm432Hz@gmail.com and we'll forward your request to the author.
______________________________________________________
All articles, videos, and images posted on Dinar Chronicles were submitted by readers and/or handpicked by the site itself for informational and/or entertainment purposes.
Dinar Chronicles is not a registered investment adviser, broker dealer, banker or currency dealer and as such, no information on the website should be construed as investment advice. We do not support, represent or guarantee the completeness, truthfulness, accuracy, or reliability of any content or communications posted on this site. Information posted on this site may or may not be fictitious. We do not intend to and are not providing financial, legal, tax, political or any other advice to readers of this website.
Copyright © 2019 Dinar Chronicles
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