The Federal Reserve and its relationship with the United States Treasury play a key role in understanding money supply, economic trends, and how they impact each other. This blog post will provide an overview of money supply, how it increases or decreases, the role banks play in controlling money supply, and its history.

Money Supply Defined

Money supply is defined as the total amount of money available in an economy at any given time. It includes cash (coins and bills), checking accounts, savings accounts, and other easily accessible forms of money such as stock certificates or bonds. Money supply is controlled by central banks such as the Federal Reserve. Central banks use their power to control the amount of money that is in circulation by buying or selling government bonds from or to commercial banks or individuals. By doing so, they can increase or decrease the amount of money available to citizens for spending or saving.

How Banks Control Money Supply

Banks play a key role in controlling money supply by lending out excess funds to customers who want to borrow them. When customers borrow these funds from banks, they are essentially increasing the amount of money available in circulation because they are using it for various purposes such as purchasing goods or services, operating private businesses, etc. Banks are able to control how much they lend out by setting interest rates on loans and offering incentives to customers who deposit funds into their accounts regularly. This helps ensure that there is enough money circulating throughout the economy without over-inflating it which could lead to inflationary pressures down the line.

The History of Money Supply

The concept of controlling money supply has been around for centuries but not until recently has it become so important for economic stability. In 1933, President Franklin D. Roosevelt established The Federal Reserve System which centralized all banking regulation into one entity responsible for making sure that there was adequate amounts of currency circulating throughout the U.S. economy without being too much or too little. Since then, The Fed has been able to maintain fairly consistent levels of inflation while still allowing for economic growth through low interest rates and easy access to capital markets.

Understanding how money supply works can be complicated but with a bit more knowledge about its history, principles advocated by economists, along with its relationship between various entities such as banks and the Federal Reserve and United States Treasury – you can gain a better insight into how this affects daily life. The advisors at Provident Financial Planning make financial decisions based on sound economic principles and beliefs that foster economic growth and stability both now and into the future! We are moving our clients closer towards achieving financial freedom and protecting against risks for those already financially secure.

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Blessings,

Paul S. Michel, CFP®

paul@providentfp.com