Page 3

Second, carrying money was a real burden due to the weight of these coins, and making larger denominations could be particularly prohibitive. Enter bearer instruments in the form of coins and printed paper with insignificant intrinsic values — money as it is known today. Money was simply a promissory note that could be exchanged for gold or silver equivalent to its face value. In the US the gold system became the prevailing method of backing the US Dollar (the US Dollar was created in 1785). That meant that for every dollar printed, there was an equivalent amount of gold in reserve.

One of the drawbacks of this system was that printing more money than the gold reserve limit would devalue the currency, undermining the country's economy. Worse yet, some banks would go bankrupt as they could not meet the depositors' demands to withdraw gold as the result of overextending their gold reserves. (Even the US Treasury had to be rescued several times in the late 1800s and early 1900s for the same reason.)

Monetary Policy

In 1913 the US Congress created the central banking system (Federal Reserve Act of 1913) known as Federal Reserve System and tasked it with creating a stable economy which could foster healthy growth and low unemployment without inflation; in other words, stable prices with maximum employment. The Federal Reserve System would influence the money supply through the Monetary Policy, which gave the Federal Reserve the authority to actively involve itself in the country's economic activity.

The Federal Reserve System is made up of 12 Federal Reserve Banks and a Board of Governors. The 12 banks are the Federal Reserve Bank of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, …