Monetary Policy Control

Monetary Policy Control

Monetary Policy, control of the banking and monetary system by a Government in the pursuit of stability in the value of the currency, to avoid an adverse balance of liayments, to attain full employment or other objectives. The immediate objective is control over the supply of money and credit (or, as the Radcliffe Report said, 'the state of liquidity of the whole economy'). It is aimed therefore at all of the financial institutions of a country, which may be regarded as forming a single large credit market.

Monetary policy may be applied through (a) the structure of 'interest rates, (b) control of international capital movements, (c) controls over the terms of hire-purchase credit, (d) general or selective controls over the lending activities of banks and other financial institutions (like building societies), over capital issues and so on.

There is some controversy over the efficacy of monetary policy as a means of economic control, and it is usually employed in conjunction with other measures (such as fiscal policy, direct controls, etc.).

Money, any commodity widely accepted as a means of exchange and a measure of value, in payment for goods and services; or in discharge of debts or obligations. At an early stage in the development of society, when wants and resources were few, exchange was normally carried out by the direct barter of one commodity for another. The increasing complexity of wants and the growth of specialization made such a system inconvenient, since it required a 'coincidence of wants' (Le. if A wished to trade with B he had to have something which B wanted, and B had to have something which A wanted, in quantities and at the times that suited both) and because it provided no objective standard of measurement. Thus it was necessary to use an intermediate commodity, easily recognizable and generally accepted; and exchange thus became indirect.

Early forms of money ranged from sea shells to cattle and women, but they were frequently inconvenient and of unstable value. Accordingly coins were made of precious metals which, because the were scarce and could be graded easily and worked into decorative forms, were attractive as ornament and later as standards of value. For centuries it was thought that coins should have a high intrinsic value, but this is not a necessary attribute of money. It was a relatively simple step from precious metals to promissory notes' and other pieces of paper as substitutes ('paper money'). Although without high intrinsic value, such notes act as money because they are widely accepted as a means of exchange.

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