Money,banking and the federal reserve system Essay

Money,banking and the federal reserve system - Essay Example In order to ensure a balance of the bank reserves and to control the monetary base, the Federal Reserve was established. For efficient use of money in the United States, the Banks and the Federal Reserve work together. Money is the most widely used liquid asset in the world today. Cash is the liquid form of money that is applicable and usable in many of the small and medium business ventures. However, there are other forms of money acceptable in many places. These include traveler’s checks, and checkable bank deposits. Money has the capability of generating gains from trading activities since its nature allows indirect exchange. It also provides a uniform way of transacting given that every product or service can be exchanged with money. It contradicts the barter system of trade (Krugman 412). Money plays three main functions in the United States economy. Firstly, it the sole medium of exchange across the country, it is possible to obtain any goods and services in exchange of money. This medium of exchange lacks the capability to be consumed hence it has to be applied in obtaining consumable goods and pay fro services. Hard economic times have called for use of different monetary forms. This has been evident in some Latin American countries that have resulted into the use of the American dollar, a situation also seen in Eastern Europe where they have used Euros. Secondly, it is used as a store of value, meaning money has the ability to purchase power over a given period. Other assets complement money as a store of value but its uniqueness is that its value appreciates in most cases. Lastly, money is a unit of account. In accounting, money is widely accepted as the medium of setting prices and calculating the value of other assets 413-414. The concept of money has continued to change with time. In historical times, silver and gold were considered as the medium of exchange, this was facilitated by their valuable nature in making of making of ornaments and jewellery. Around independence time in 1776, paper money was getting used to complement the gold and the silver coins. The transition saw the introduction of commodity-backed money that whose value was dependent on the promise that it could be possible to turn it into value on demand. (Krugman 414).To further enhance the monetary form, the United States Dollar was adopted as a generally acceptable mode of transacting in exchange of goods and services. This introduced the so-called fiat money that derives its value from the official status it adopts. This type of money has advantages over the former types in that it does not use other resources apart from the material used in its making and secondly, its supply can be regulated to take care of specific economic needs. However, the challenge remains in production of fake currency (Krugman 415). There are two types of monetary aggregates, denoted by the Federal Reserve as M1 and M2. M1 entails the cash, traveller’s checks and ch eckable bank deposits. Other near-moneys are inclusive in M2. In the United States, year 2011 September, M1 was equivalent to $2,136.9 billions while M2 was $9,603.6 billions of dollars (Krugman 416). Near-moneys are accompanied by interests that the cash dos not, this is the reason why they pay higher interests than checkable bank deposits. Banks plays a critical role in the money industry in the United States and all over the world. It is evident that banks play a role in linking the Federal Reser