The Monetary System

Monetary System
- A set of policies, frameworks, and institutions by which the government creates money in an
economy.
- It usually consists of the national treasury, the mint, the central banks and commercial banks.

Three Types of Monetary System

1. Commodity Money - This is made up of precious metals or other commodities that have
intrinsic value.
2. Commodity Based Money - This draws its value from a commodity but doesn’t involve
handling the commodity regularly.
3. Fiat Money - The currency, which by government decree is legal tender which is made up of
paper currency or base metal coin.

Uses of Money
1. Medium - Money is used as a means of payment or a medium of exchange
2. Measurement - It is also a standard unit of measurement that can be used to price things and
to compare value.
3. Value - Money can be used to store value, and thus it becomes an asset itself.

The Federal System Reserve

- The Federal Reserve System, often referred to as the Federal Reserve or simply "the Fed," is
the central bank of the United States of America.
- The Federal Reserve was created on December 23, 1913, when President Woodrow Wilson
signed the Federal Reserve Act into law

The Purpose of the Fed

1. Conducting the nation's monetary policy by influencing money and credit conditions in the
economy in pursuit of full employment and stable prices.
2. Supervising and regulating banks and other important financial institutions to ensure the
safety and soundness of the nation's banking and financial system and to protect the credit
rights of consumers.
3. Maintaining the stability of the financial system and containing systemic risk that may arise in
financial markets.
4. Providing certain financial services to the U.S. government, U.S. financial institutions, and
foreign official institutions, and playing a major role in operating and overseeing the nation's
payments systems.

THE DECENTRALIZED SYSTEM STRUCTURE AND ITS PHILOSOPHY

- In establishing the Federal Reserve System, the United States was divided geographically into
12 Districts, each with a separately incorporated Reserve Bank.
The Federal Reserve officially identifies Districts by number and Reserve Bank City
- As originally envisioned, each of the 12 Reserve Banks was intended to operate independently
from the other Reserve Banks. Variation was expected in discount rates—the interest rate that
commercial banks were charged for borrowing funds from a Reserve Bank.
The setting of a separately determined discount rate appropriate to each District was considered
the most important tool of monetary policy at that time

THE U.S. APPROACH TO CENTRAL BANKING

- Federal Reserve Act purposely rejected the concept of a single central bank
- They provided for a central banking "system" with three salient features.
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THE THREE KEY FEDERAL RESERVE ENTITIES
- The Federal Reserve Board of Governors (Board of Governors), the Federal Reserve Banks
(Reserve Banks), and the Federal Open Market Committee (FOMC) make decisions that help
promote the health of the U.S. economy and the stability of the U.S. financial system.

Depository Institutions
- Offer transaction, or checking, accounts to the public, and may maintain accounts of their own
at their local Federal Reserve Banks
- They are required to meet reserve requirements—that is to keep a certain amount of cash on
hand or in an account at a Reserve Bank based on total balances in the checking accounts they
hold.

Advisory Councils
- Federal Advisory Council (FAC). This council established by the Federal Reserve Act,
comprises 12 representatives of the banking industry. It ordinarily meets with the Board four
times a year, as required by law.

- Community Depository Institutions Advisory Council (CDIAC). It was originally

established by the Board of Governors to obtain information and views from thrift institutions
(savings and loan institutions and mutual savings banks) and credit unions.

- Model Validation Council. This council was established by the Board of Governors in 2012
to provide expertise independent of its process to rigorously assess the models used in stress
tests of banking institutions.

- Community Advisory Council. This council was formed by the Federal Reserve Board in
2015 to offer diverse perspectives on the economic circumstances and financial service needs
of consumers and communities, with particular focus on the concerns of low and moderate
income populations.