Question

Should the Federal Reserve System control the nation's money supply? Defend your position using economic principles.

Have to be at least 10 sentences and please provide references.

Answer 1

The fed is required to perform the below activities:

1. Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates
2. Supervising and regulating banking 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 financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system.

So the first important point is that the Fed actually does a lot. One cant eliminate these functions. If you got rid of the central bank, you would need to push many of these functions to other regulators or private firms. For example, inflation has to be kept in check somehow. Prudential supervision is also important. The problem with eliminating the Fed is that you would need to delegate these responsibilities to another entity that could do them better.

For the Fed, supervision is a two-way street. On one hand, it provides the central bank with a great deal of additional information about the banking system, which it can use for its other functions like ensuring financial stability. On the other hand, the Fed has a unique perspective to offer when it comes to supervision, because it has a great deal of data on and experience with financial markets, global regulation, and macroeconomics. So not only will supervision help the central bank to be more effective, but its background will help it to be an unusually well-informed supervisor.

The Fed plays a very crucial role in controlling the nation's money supply. If for any reason if would not be the fed one option would be to put the government directly in charge of monetary policy. Another way to conduct monetary policy could be to peg currency to a commodity like gold. The U.S. used to take this approach through the gold standard. With this strategy, some think you don't need a Fed, because the quantity and value of the currency depend on the quantity of the commodity