History of monetary policy in the United States

[1] With the creation of the Bank of England in 1694, which acquired the responsibility to print notes and back them with gold, the idea of monetary policy as independent of executive action began to be established.

[2] The goal of monetary policy was to maintain the value of the coinage, print notes which would trade at par to specie, and prevent coins from leaving circulation.

Despite what some may consider discriminatory practices with insider lending, these banks actually were very sound and failures remained uncommon, further encouraging the financial evolution in the United States.

Prior to the ratification of the Articles of Confederation & Perpetual Union, only the States had sovereign power to charter a bank authorized to issue their own bills of credit.

The predominant reason that the Second Bank of the United States was chartered was that in the War of 1812, the U.S. experienced severe inflation and had difficulty in financing military operations.

Its role as the depository of the federal government's revenues made it a political target of banks chartered by the individual states who opposed the B.U.S.

Viewed through the lens of party elite discourse, Schlesinger saw inter-party conflict as a clash between wealthy Whigs and working class Democrats."

(Grynaviski) President Andrew Jackson strongly opposed the renewal of its charter, and built his platform for the election of 1832 around doing away with the Second Bank of the United States.

During September 1833, President Jackson issued an executive order that ended the deposit of government funds into the Bank of the United States.

The Michigan Act (1837) allowed the automatic chartering of banks that would fulfill its requirements without special consent of the state legislature.

Congress passed the National Bank Act in an attempt to retire the greenbacks that it had issued to finance the North's effort in the American Civil War.

The Republican Party nominated William McKinley on a platform supporting the gold standard which was favored by financial interests on the East Coast.

However, his presidential campaign was ultimately unsuccessful; this can be partially attributed to the discovery of the cyanide process by which gold could be extracted from low grade ore.

The McKinley campaign was effective at persuading voters that poor economic progress and unemployment would be exacerbated by adoption of the Bryan platform.

The legislation provided for a system that included a number of regional Federal Reserve Banks and a seven-member governing board.

In March and April 1933,[11] in a series of laws and executive orders, the government suspended the gold standard for United States currency.

[13] The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century.

The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate by tying its currency to the U.S. dollar and the ability of the IMF to bridge temporary imbalances of payments.

An increase in this rate makes Bank Reserves more profitable, and so more expensive to purchase with risky financial assets, lowering the marginal value of taking greater risks.

This is expected to lead to commercial banks rebalancing their portfolios in favour of more safe investments, reducing profitability and the size of their balance sheet.

The primary way that the central bank can affect the monetary base is by open market operations or sales and purchases of second hand government debt, or by changing the reserve requirements.

However, if financial markets are functioning well, there is no need for the ultimate settlement unit: bank reserves, as every entity is confident they can obtain as much as they need at current prices.

But even in the case of a pure floating exchange rate, central banks and monetary authorities can at best "lean against the wind" in a world where capital is mobile.

To maintain its monetary policy target, the central bank will have to sterilize or offset its foreign exchange operations.

Therefore, to sterilize that increase, the central bank must also sell government debt to contract the monetary base by an equal amount.

This is to avoid overt manipulation of the tools of monetary policies to effect political goals, such as re-electing the current government.

Independence typically means that the members of the committee which conducts monetary policy have long, fixed terms.

In the 1990s, central banks began adopting formal, public inflation targets with the goal of making the outcomes, if not the process, of monetary policy more transparent.