A monetary system is any structure initiated by the government and mandated to issue currency, acknowledged as the medium of exchange by its citizens and governments of other nations. The central bank manages the monetary system of a country; this same bank has the responsibility of printing money and controlling the economy. Since the colonial period, coins from the European colonies had circulated in all the colonies. The Spanish coins gained dominance due to the scarcity of coins, during this time; the main form of trade was barter trade. The trade-involved items such as rice, tobacco, or animal skins, which took the form of money paper and notes, had varying rates of discount in different colonies rendering them of very low value (Ronald & Wright, 2006).
The high population in the U.S. called for increased trade and commerce. This forced the United States government to look for ways to establish a strong, stable, and a central monetary policy. In 1792, the congress instituted and mandated to establish a national monetary system that led to the formation of the coinage Act. This led to the creation of the dollar, which was the primary monetary unit in the U.S. The coinage Act mainly involved the making of the dollar using silver and gold. Gold and silver were the only available minerals at that time.
In 1918, the Federal Reserve Act was operational. This Act enabled and authorized the establishment of regional Federal Reserve banks. The bank would issue money to members by drawing on their deposits or borrowing commercial balance if their balance at the bank was insufficient. In this time and age, monetary systems use money made from metals. The carry out and initiate monetary policies that stabilize the growth rate in money supply which influences the economy controlling the inflation rates. Supply of ready money for domestic use and business loans subsequently reduce the threat of unemployment, debt, and bankruptcy. Generally, the united state monetary system should ensure flexibility of ready money in order to make it a major stimulator of the economy (Ronald & Wright, 2006).
A national monetary system has five important components, which include the base of the monetary system, categories of money, money relation, money demand, and external monetary relations. The base of monetary system points to the monetary standard and the monetary unit. Monetary standards refer to the material representation of the money or the value beyond the money, which helps to define a monetary unit. The monetary standard identifies three types of monetary systems based on money metals, gold exchange standard, and credit money. Development of the monetary systems, the banknotes originated in two forms; drafts, which were receipts attesting the value held in an account and bills which were issued with a promise to covert later.
Money creation refers to a process where money is issued or produced. There are two different ways of creating money, by either physically manufacturing a monetary unit or loaning out a physical unit several times through fractional reserve lending. In banks, money creation is possible because the public readily accepts claims on bank deposits in payment for goods and services. Money demand represents the people's tendency to contain a specific quantity of money. This depends on the destination a person gives the money. A person will try to hold a certain amount of money depending on the destination of the money. In addition, money is held depending on transactions goals. Lastly, the external monetary relations refer to the transfer involved in transferring of money abroad. They also refer to some essential monetary issues including, the domestic money with international functions, freely usable currencies and international money exchange rates between the currencies, methods of payment and international payment instruments (Eichengreen, 2008).
One of the organizations resulting from the monetary systems is the International Monetary Fund (IMF). The IMF is a set of internationally agreed rules, convention, and supporting institutions that support the rules. In so doing, they enhance facilitation of international trade, cross border investment, and the relocation of capital between the national states supporting the international monetary fund. In addition, this organization has one hundred and eighty eight member countries working to foster global monetary cooperation's, secure financial stability, and promote high economic growth, and…