What is the Central Bank?

A central bank is a financial institution that is authorized by a government to oversee and regulate the nation’s monetary system and its commercial banks. It produces and manages the nation's currency. Most of the world’s countries have central banks for that purpose. In the United States, the central bank is the Federal Reserve System

The job of the Central Banks?

Price stability: The primary role of central banks is usually to maintain price stability, as defined as a specific level of inflation. Don't get lost now, we’ll deal with inflation separately I assure you.

High Employment: Macroeconomic policy generally aims to reduce unintended unemployment. In broad terms, the goal of macroeconomic policy is to provide a stable economic environment that is conducive to fostering strong and sustainable economic growth, on which the creation of jobs, wealth, and improved living standards depend.

Economic Growth: Economic growth can be enhanced by investment in capital, such as more or better machinery. A low-interest rate implies that firms can borrow money to invest in their capital stock and pay less interest for it. Lowering the interest is therefore considered to encourage economic growth and is often used to alleviate times of low economic growth. On the other hand, raising the interest rate is often used in times of high economic growth as a contra-cyclical device to keep the economy from overheating and avoid market bubbles. Further goals of monetary policy are the stability of interest rates, the financial market, and the foreign exchange market. Goals frequently cannot be separated from each other and often conflict. Costs must therefore be carefully weighed before policy implementation.

Just to give you a general overview of some of their jobs. Now, more importantly, I want to talk about some other operations they carry out as an entity. Some of these include;

Monetary policy: by setting the official interest rate and controlling the money supply.

Financial stability: acting as a government's banker and as the bankers' bank (lender of last resort )

Reserve management: managing a country's foreign exchange gold reserves and government bonds.

Banking supervision: regulating and supervising the banking industry and currency exchange;

Payments system: managing or supervising means of payments and inter-banking clearing systems;

Coins and notes issuance;

Other functions of central banks may include economic research, statistical collection, supervision of deposit guarantee schemes, and advice to the government on financial policy.

Now that we have all the information we need, let's take a closer look into Monetary Policy, as that's where our focus is, given that we're talking about money.

Now, how do they handle the monetary policies or rather, the current monetary system our governments created?

It's simple, by setting the official interest rates and controlling the money supply.

How the Central Banks Control the Monetary Policy / Current Monetary System from 1973 till Date.

Currency Issuance:

Monetary policy involves establishing what form of currency the country may have, whether a fiat currency, a gold-backed currency (disallowed for countries in the IMF; which was established before the fall of the Bretton Woods System of Monetary Management), a currency board, or a currency union. There are tools the central banks use to checkmate and ensure this monetary policy survives, one of which is open market operations.

A central bank affects the monetary base through open market operations if its country has a well-developed market for its government bonds. This entails managing the quantity of money in circulation through the buying and selling of various financial instruments, such as treasury bills, repurchase agreements or "repos", company bonds, or foreign currencies, in exchange for money on deposit at the central bank. Those deposits are convertible to currency, so all of these purchases or sales result in more or less base currency entering or leaving market circulation. For example, if the central bank wishes to decrease interest rates, it prints money and purchases government debt/bonds thereby increasing the amount of cash in circulation or crediting banks’ reserve accounts. Commercial banks then have more money to lend to the public, so the central bank reduces lending rates, making loans less expensive. Cheaper credit card interest rates increase consumer spending. Additionally, when business loans are more affordable, companies can expand to keep up with consumer demand. They ultimately hire more workers, whose incomes increase, which in turn also increases the demand for notes. So they use this method to stimulate an increased demand and drive economic growth to a healthy rate because unemployment has automatically declined too. Then in a case where the central bank wishes to reduce money in circulation, it does the opposite by selling government bonds to the public to reduce the quantity of money in circulation via bank deposits, then increase interest rates from lending banks, which will, in turn, reduce consumer spending on credit cards and also reduce investment companies or whoever is interested in taking bank loans at that time due to the high interest rate.

I'm sure that was a clear explanation of the monetary policy on currency issuance and the use of open market operations as a tool for sustaining this system of money they created. Now it seems like as long as they have this monetary system under control, everything is fine yeah? Actually it's not. Next, we'll look at some of the challenges our governments are facing with this new monetary system they’ve come to love very much. One of their biggest consequence; inflation.

As always, I'm your favorite crypto journalist, Clever Abaribote.

Sources: Wikipedia, Investopedia, Wallstreetmojo, Economicsnetwork.