Blog: Our Central Bank Is Not Created to Solve All Our Economic Woes – Columbia University

The United States today relies on the Federal Reserve (the “Fed”) to do too much. The Fed is built for an important but limited purpose. It is a monetary authority, designed to manage the money supply. Congress designed the Fed with two types of money in mind: cash issued by the government (coins and paper bills) and deposits issued by government-chartered, investor-owned banks. The supply of cash is relatively stable, but the supply of deposits is more elastic. When banks lend, they create more deposits, increasing the balances in borrowers’ bank accounts. When the amount of deposits increases, the purchasing power of depositors increases. That is because people use deposits to pay rent, credit card bills, and make payroll. The Fed’s job is to control the expansion of deposits so that it is consistent with full capacity utilization in the economy over the long run.

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