Business

Money has a lot of importance as it the medium of exchange of the goods and services that we need on a day to day basis. With this in mind therefore, it is necessary to note that money has got to be kept in check because it affects the prices of commodities if it is too much in circulation and also if it is too little in circulation. There has got to be the right mix of money supply although it can never be perfect. Money causes such economic activities as inflation and it is as a result of these that governments have established central banks to oversee the circulation of money in the economy and be able to correct any anomalies that come about as a result of having too much or too little money in circulation. In this paper, I will discuss more the issue of a central bank and show the importance of having a bank like that one.
1 a) Define and describe the makeup of the Central Bank and how it operates.
       The central bank is a government institution that oversees and controls the functions of the national banks that have been established in a country in order to streamline a countrys banking system. It is a bankers bank. With disregard to a federal system of banking, all other banks would exercise what is called free banking whereby there would be no inflation. A central bank therefore does all the checks and balances for other banks. It is made up of all other banks that give services to the customer. That bank would have an absolute monopoly of note issue and reserve requirements and would then insure a multilayered pyramiding of top of its notes. The central bank could bail out banks in trouble and inflate the currency in a smooth, controlled and uniform manner throughout the nation.
b) How does the central bank remove the limits (under free banking) of bank credit inflation As indicated earlier, the central bank is either owned or run by the government and so it has all the powers accorded to it by the central government to do transactions on behalf of all other banks. It is given sole monopoly to issue the currency in circulation within an economy by the government. You will find that other banks cannot issue money and the inability of them not issuing money for circulation enables only one source that can control the level of inflation.
c) Discuss the determinants of the money supply under central banking
     When the depositors of a bank redeem their demand deposits from their bank, it might require the bank to draw its reserve money from the central bank. The central bank therefore has to supply the bank with the amount needed with a view to give out notes. The total money supplied does not change since the money given out by the central bank will act as the demand deposits made by that bank. The total amount of money will change and not the form. If there is a lot of money in circulation, the government through the central bank will sell its bonds to the market so as to reduce the money supply and will buy back the bonds if there is little money in circulation
Part II
a) The level of total bank reserves is controlled by the actions of
The public it is evident that when there are increases in demand for cash by the depositors, there is an equal drop in the central banks reserves. This will also have a multiplier effect in decreasing total demand deposits translating into a lesser effect in cutting the amount total of money.
Those actions controlled by the central bank the central bank through the open market operations moves to the market as a different entity and transacts in buying and selling of assets. The purchase of any asset is an open market purchase the sale of any asset is an open market sale.
The public will draw down its demand deposits by  3 billion in order to obtain cash. The bank goes to the central bank and draws down the money. Initially, the money supply will remain the same due to the fact that demand deposits will have reduced by  3 billion while the outstanding notes to central bank will have increased by the same amount. Reserves will decrease by  3 billion while money in the hands of people will increase with the same margin. For the banks to maintain the required reserve ratios, they have therefore got to reduce their loans and demand deposits for the total deposits to reduce as well. A reduction in  3 billion of reserve ratio will see a reduction in the demand deposits with a higher margin.
   When the Feds system manager does an open market purchase of  10 million of governments bond, the private dealers money supply will increase in Bank of America in terms of increased demand deposits by the same amount. This is as a result of the Fed having issued a check that the dealer deposits with his bank. The Bank of Americas net reserves will also go up with the same margin of  10 million. The total assets of the dealers bank will increase with the same margin of  10 million. Demand deposits at the Fed bank will increase because the bank will have written itself a check once it buys of the bond. The assets also increase as it now owns the  10 million worth of the bonds. 
3) The increase in bank reserves from loans issued by the Fed bank, increased deposit of cash or through open market purchases are transactions that happen in all banks. A bank will increase its loans and deposits by 1 minus the reserve requirement. This therefore initiates a ripple or multiplier effect in the procedure of credit expansion which has a lesser magnitude form the preceding one. You will find that the money supply from each consecutive bank decreases by a certain margin depending on the figures that have been transacted. As the multiplier effect continues to take place, the banks demand deposits will increase by a certain percentage of the preceding bank. This process enables me to understand the effects of the multiplier effect on money supply and also how the central bank in conjunction with the other national banks controls the mystery of inflation.
4)  After the war of 1812, it is said that the American monetary system was at a fateful crossroads. Individual banks issued flat money that had negative effects to the economy. There was massive depreciation of assets, and the banks were not being able to buy back the money that was in circulation. Democratic-Republican establishment in 1816  the old Federalist path of a new inflationary central bank, the second bank of the United States.
The Federal government owned a portion of the bank and also it was an improvement of the first central bank. The purpose of the bank was to purchase the large debt that was in circulation, receive deposits of the governments money and create a currency that would be used nationally by everyone. 
5 a)The war was being financed by printing more paper money which even led to a suspension of specie payment by both the treasury and the national banks. By 1863 the money supply had zoomed to  1.44 billion, an increase of 92.5  in three years. The aftermath was an increase in prices of goods and services. During this year the Federal government had stopped issuing hard money that had depreciated greatly and instead was buying back the large currencies in the market by way of issuing public debt. This was largely done by selling government bonds to the public.  c) The national banking system was definitely a forerunner in the establishment of the Federal Reserve System in 1913. This is simply because, business could not be done the same way again with the catastrophic results that were being experienced when there was no way of monitoring the activities of national banks. There was a lot of money in circulation and this led to high inflation thus increase in prices of commodities were felt. For the rates of inflation to be checked and controlled, the creation of a bankers bank was necessary and it is due to the events that occurred with the national banks that led to establishment of a Federal reserve system. The reserve system was therefore put in place to check on the activities of the national banks to curb to improve on the money circulation and reduce the inflation rates.