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The primary tool of monetary policy is usually a short term interest rate. In the case of the US for example, the Federal Reserve targets the Fed Funds rate, the rate at which member banks lend to one another overnight. Monetary policy is also often expressed by the central bank trying to target or manipulate the exchange rate with major trading partners.
Before there was money, there was the barter system, where items were exchanged directly for other items. There was no monetary policy because there was no money.
The first 'money' was effectively the raw commodities of wheat, barley, etc. Later, gold, silver, ivoryIvory is a hard, white, opaque substance that is the bulk of the teeth and tusks of animals such as the elephant, hippopotamus, walrus, mammoth, etc. Prior to the introduction of plastics, it was used for billiard balls, piano keys, buttons and ornamental, amberThis is about the material called amber. For other things called amber, see Amber (disambiguation). Amber is a fossil resin much used for the manufacture of ornamental objects. Although not mineralized it is sometimes considered and used as a gemstone., or other precious materials made trade more convenient. Monetary policy consisted of the populace regarding a particular commodity as having equal value to any other set of goods. However, there were problems with using gold and silver; the purity was questionable and therefore the value debatable.
To solve this, governments adopted the technology of mintThis article is about the herb. See Mint (disambiguation) for other meanings. Mentha aquatica ''Mentha arvensis ''Mentha citrata ''Mentha longifolia ''Mentha x piperita ''Mentha pulegium ''Mentha requienii ''Mentha spicata ''Mentha suaveolens True Mint sing coins of known purity and size. This allowed the markets to more consistently set the value of goods and services. Minting coins was effectively the first government monetary policy, since it allowed for more free flows of money through the economy (it increased the 'velocity' of the money supplyMoney supply ("monetary aggregates", "money stock"), a macroeconomic concept, is the quantity of money available within the economy to purchase goods, services, and securities. Because (in principle) money is anything that can be used in settlement of a d). This drastically improved economic growthEconomic growth is the increase in the value of goods and services produced by an economy. It is conventionally measured as the percent rate of increase in real Gross Domestic Product, or GDP''. Growth is usually calculated in real terms in order to net o. Governments today regulate the velocity of money by many means, only the most basic of which is printing and coining currencyFor exchange rates, see here. A currency is a unit of exchange, facilitating the transfer of goods and services. It is a form of money, where money is defined as a medium of exchange rather than e. a store of value. A currency zone is a country or region.
A very large development in the 'technology' of money was the advent of ' fiat currency'. This uses the concept that money is worth whatever anyone thinks it is worth, so the government prints a limited supply of it and everyone accepts that that is money. This allows the money supply to grow and shrink as the government desires it to do, in accordance with the government's monetary policy.
Most recently, the technology of money has been improved by electronic moneyElectronic money (or digital money) refers to cash and transactions using electronic means, encompassing the use of computer networks (such as the Internet) and digital stored value systems. Electronic Funds Transfer (EFT) is an example of electronic mone. This really is an old concept, similar to writing a check and cashing a check at the same bank (in the US, this is the Fed or Federal Reserve Bank). To oversimplify, electronic money allows transfers from one entity to another in microseconds. This can vastly speed the velocity of money, and in the case of large corporations, this allows them to perform many more transactions, thus making each transaction vastly cheaper. Electronic money is a benefit of the Federal Reserve Banking system.
Important to mention here is that alongside the development of money came the development of credit systems. Credit is borrowing and repaying loans. Credit is possible in a barter system, as well as any other system. The amount of credit available in an economy drastically influences the amount of money available that economy. Thus, monetary policy is intricately tied to the availablity of credit. Governments can and do act as both borrower and lender to banks and individuals to either add or subtract money from the economy, which is the goal of monetary policy.
The advancement of monetary policy as an engineering discipline has been quite rapid in the last 150 years, and it has increased especially rapidly in the last 50 years. Monetary policy has grown from simply increasing the monetary supply enough to keep up with both population growth and economic activity. It now encompasses (and must respond to) such diverse factors as:
A small but vocal group of people advocate for a return to the gold standard (the elimination of the dollar's fiat currency status and even of the Federal Reserve Bank). Their argument is bascially that monetary policy is fraught with risk and these risks will result in drastic harm to the populace should monetary policy fail.
Most economists disagree with returning to a gold standard. They argue that doing so would drastically limit the money supply, and throw away 100 years of advancement in monetary policy. The sometimes complex financial transactions that make big business (especially international business) easier and safer would be much more difficult if not impossible. Moreover, shifting risk to different people/companies that specialize in monitoring and using risk; they can turn any financial risk into a known dollar amount and therefore make business predictable and more profitable for everyone involved.
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