Every country has a monetary system that is put in place by the government. A monetary system refers to a set of mechanisms that are put in place by the government in order to supply money or provide cash to the country’s economy. A monetary system is a term used in reference to anything used as a measure of wealth or that has generally been accepted as a standard measure of value (Timberlake, 2007). The country may use the commodity money system or the fiat money system as its monetary system. The commodity money system is the monetary system whereby a certain commodity like gold is used as the unit of value and the commodity is used as money (Meltzer, 2003). Any other types of money like paper notes are convertible to commodity money on demand. The Fiat money system is a paper currency that is mostly used by most countries including the US (Cheol & Resnick,1997).
The monetary system of the US has a history. During most parts of the 19th century, the monetary system of the US was based on bimetallism. In economics, bimetallism is referred to as a monetary system or standard that has traditionally relied on silver and gold as a measure of the monetary unit value. A given quantity or either silver or gold is equated to the country’s monetary value (Cheol & Resnick, 1997). The use of this monetary system by the US ensured there is a fixed exchange rate between the two metals and also ensured the availability of unlimited market for the two metals imposing no restrictions to the use of these metals as coins. This resulted in all the money in circulation is in form of gold or silver. The dollar was in circulation and was legally defined as having a fixed value of gold (Timberlake, 2007). While gold was still thought to be important for the maintenance of confidence in the dollar, its connection with the actual use of money was at best vague.
The use of the bimetallism system caused a major problem to the trading internationally between the US and other states since there lacked a standard unit of exchange between two or more states since each nation had its independent setting on the rate of exchange between the two metals (Meltzer, 2003). This led to gold being abandoned as the medium of exchange domestically and internationally. Since 1970, all U.S. currency, paper or coin, is essentially fiat money. All money and coin in circulation in America up to recent time is now legal tender, as per the central bank and government law (Cheol & Resnick,1997).
Under the law in the US, all money in circulation must be accepted at face value by creditors in payment of any debt, public or private. Most of the currency circulating in the United States consists of Federal Reserve notes. These notes are issued in the denomination and they range from $1 to $100 according to the federal system in the US. These notes are guaranteed by the US government, secured by government securities, and are eligible commercial papers for exchange (Timberlake, 2007). However, there are a fraction of coins in circulation as currency, but, none of the coins has a commodity value equal to its face value. Even with the advance of time, the amount of currency in circulation in form of coins is less widely used as compared to the use of checks, debit cards, and credit cards as means of payment. This means that individuals generally accept their debts in form of cheques which the banks transact eventually releasing the money to individual bank accounts being payment of a debt (Cheol & Resnick,1997).
Generally, the US has evolved through different monetary systems before reaching its current system. These were, in order: the constitutional gold (and bimetallic) standard, the First and Second Banks of the United States, the Independent Treasury, the National Banking System, clearinghouse associations, and the National Reserve Association. This brought the foundation of the Federal Reserve System as the last institution (Meltzer, 2003).
There are three components that constitute the United States monetary system. The first of these components is the US mint. The main role of the US mint is to ensure the country’s coinage circulation to facilitate the conduction of commerce and trade. The United States Mint is placed under the Department of State of the country, being independent and its core activity is to convert precious metals into standard coins for use by everyone in the country (Cheol & Resnick,1997). The second component is the central bank, reserve bank, or monetary authority, which is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country.
For every country, the commercial banking system is often the prerogative of the central bank. The central bank is mainly charged with the responsibility of ensuring the money supply. In addition, it is also actively involved in the control of interest rates. The central bank also plays a crucial role by ensuring that the banking sector gets money when the country has been hit hard by harsh economic conditions. In this case, the central bank plays the role of lender of last resort. The last component is a commercial bank which is a type of financial institution and intermediary (Timberlake, 2007). It is a bank that provides transactional, savings, and money market accounts and accepts time deposits. Commercial banks are banks or a division of a bank primarily dealing with deposits and loans from corporations or large businesses.
The monetary system has had struggles to curb the issue of counterfeiting. To deter the wave of counterfeiting that uses computer technology, further changes including colors in addition to green were introduced in order to help shape the current system. The monetary system of the US has also had to cope with the obstacle of having a monetary system that is not sufficiently diverse. As a result, its dams and bottlenecks creative energies and keeps the citizens trapped in a world of scarcity and suffering when the citizens actually have the capacity to create a very different reality (Cheol & Resnick,1997). This monetary has also had to cope with the risk of a sustained deterioration in the financial conditions of the country. Although the monetary system might have already marked down the growth projection, there has also been a weaker housing market that could depress the economic activities of the country. Another obstacle that the monetary system of the US has had to cope with is handling global imbalances. These are the obstacles and struggles that have helped shape the current monetary system of the US (Meltzer, 2003).
Various financial and economic decisions are affected by the monetary policy of the United States. Some of these decisions include whether one should buy a new car, house, or borrow to invest in a business. Other economic decisions often impacted by the US monetary system include saving in the stock market, bonds, or bank savings accounts.
Cheol, E., & Resnick, B. (1997). International Financial Management. Fifth Edition. Boston, Mass: McGraw-Hill/Irwin
Meltzer, A. H. (2003). A History of the Federal Reserve. Vol. 1: 1913–1951. Chicago: University of Chicago Press.
Timberlake, R. (2007). The monetary system of the United States. The Columbia Encyclopedia, 6th Ed: Columbia University Press.