Monetary policy is one of the tools that a national Government uses to influence its
economy. Using its monetary authority to control the supply and availablity of money, a
government attempts to influence the overall level of economic activity in line with its
political objectives. Usually this goal is “macroeconomic stability” – low unemployment,
low inflation, economic growth, and a balance of external payments. Monetary policy is
usually administered by a Government appointed “Central Bank”, the Bank of Canada and
the Federal Reserve Bank in the United States.
Central banks have not always existed. In early economies, governments would supply
currency by minting precious metals with their stamp. No matter what the creditworthiness
of the government, the worth of the currency depended on the value of its underlying
precious metal. A coin was worth its gold or silver content, as it could always be melted
down to this. A countrys worth and economic clout was largely to its holdings of gold and
silver in the national treasury. Monarchs, despots and even democrats tried to skirt this
inviolate law by filing down their coinage or mixing in other substances to make more
coins out of the same amount of gold or silver. They were inevitably found out by the
traders, money lenders and others who depended on the worth of that currency. This the
reason that movies show pirates and thieves biting Spanish dubloons to ascertain the value
of their booty and loot.
The advent of paper money during the industrial revolution meant that it wasnt too
