Updated date:

The Independent Money—Monetary Policy

I have been hooked about discussing every nook and cranny relating to business and economy for a while now.

the-independent-moneymonetary-policy

Money is not an unknown idiom in the lives of people. If money disappeared somehow, society or even the world would collapse. Because there will be no measurement of worth, individuals will get confused about their everyday tasks. People won't receive services from many jobs because they use the money to do the works. Hence, money is much more important than ordinary individuals can comprehend.

The real importance of money lies in the definition of monetary policy. Monetary policy is a decision that can be taken by the monetary authority within a country. Usually, the monetary authority in nations of the world is their central banks. For example, there is the Federal Reserve in the USA. And there is The European Central Bank to regulate monetary policy in the European Union. The most crucial policy that a monetary authority possesses is increasing or decreasing the amount of money within a region.

Therefore, monetary policy has tons of virtuous and disastrous potential. If done correctly, monetary policy could save a nation from an economic crisis. But it would also be the case of a nation's downfall if not executed well or planned concisely. It is a matter of experts to decide which is the best step for a nation to take. However, individuals still can understand what the monetary policy is trying to do to prepare the best course to take within their routine, such as selling stocks or saving money.

"Make money and the whole nation will conspire to call you a gentleman."

— Geordge Bernard Shaw

Fiscal Is the Brother From Another Mother

the-independent-moneymonetary-policy

People seemed confused regarding fiscal and monetary policy. People learned the difference in high school, but nobody can remember all the subjects they had learned. So, it is acceptable that ordinary people don't fully understand what fiscal and monetary policy is. But Politicians may use unawareness to stir them into their political agenda, whether good or bad.

The most apparent difference between the two is who has the power to issue them. The government issues a fiscal policy, but monetary policy is within the power of central banks. The other minor difference is how direct the approach of the policy. Fiscal uses a more indirect approach like reducing taxes, and monetary takes a direct strategy by limiting the amount of money available. By doing these things, fiscal and monetary policies are always working with each other.

After that, a new question arises from the majority of people. Why should there be two separate organizations to regulate the economy within the same nation? Isn't the central bank or the government enough to do that? Economists are still arguing whether these organizations can or can't merge to one, but they agree that the best course to take is to split them apart because of error prevention. If one of them takes a misdirected policy, the other could repair the damages by issuing the correct steps.

The Backlash of Monetary Policy

the-independent-moneymonetary-policy

The monetary authority or central bank is an independent organization within a nation. Therefore, it is not under the governments within the hierarchy of the economy. So, the government cannot influence the policy of the central bank directly. People believe that this independency could only lead to unsupervised crimes, such as money laundering. But individuals rarely understand that a controlled monetary authority may be more dangerous than what they believe.

Statistically, independent central banks have a higher success rate regarding effective policymaking than controlled central banks. This result may stem from the people that work within the central banks. An independent central bank will select the most capable candidates to work within their environment, but government-owned central banks will consist of experts and politic-related candidates. It is not a surprise that a team of experts could undermine mixed politicians and economists regarding money.

Having much more freedom than most organizations within the nation is valid for the central bank, but saying that the central bank has too much freedom is questionable. For an authoritarian nation, having a controlled central bank may be a viable option. But nations that use a democratic system are much faster and more reliable at developing their economy than dictatorship countries. Therefore, it is better to give the central bank more freedom than risking the monetary authority to be steered by political agenda.

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

— Henry Ford

How Monetary Policy Saves the USA

the-independent-moneymonetary-policy

In 2008, an economic crisis struck the world. Protests were a joint event in every nation during that time, and the USA is not an exception. The price of daily goods in the market rose, and people were forced to cut their spending to focus on everyday livings. Factories wouldn't operate because of a lack of workers, and individuals didn't have jobs because their workplace can't produce any output. It was a dire situation for the USA.

Seeing the decreasing incentive on the people, the Federal Reserve issued a bold move. They enacted a policy to increase the amount of money even though the value of money was inflating. Therefore, many people doubted that this was the right step to take. When the result began to show, people blamed the monetary policy that only worsened the situation. Besides, the idea of adding more money when the value is decreasing is absurd from people's perspective.

After a thorough study, economists agreed that the issued policy lessened the damage done by the recession. If the federal reserve hadn't enacted this regulation, the recession would be more catastrophic. But the image of the Federal Reserve had been damaged by public opinions. Many people deemed that too much freedom for the Federal Reserve was the problem in the first place. Luckily, the central bank's independent authority wasn't taken away.

People Perception of Money Is Questionable

People see money as a tool for happiness. Because of using money, individuals could buy nice cars or travel the world. While it is true, the use of money is much more than that. It could turn the wheel of the economy, cause wars, or save lives. That is why a separate field of study is dedicated to only study money, and how money should be used for the benefit of the people.