Central bankers may therefore want to encourage some form of recession, but a full depression — such as that which occurred in the 1930s — is not in the best interest of anyone, because of the disastrous effects on the economy.


What is money supply?

Think of a Monopoly game: When more money is made available to players — by giving more money for passing Go, for example — there's more money to spend on buying property from other players. A country's money supply has several different components, ranging from coins and banknotes to deposits in savings and checking accounts. The money supply most often referred to in the news is M1, which consists of all currency in circulation as well as money in “easy-to-access” bank accounts. Other, wider measures of money supply — such as M2, M3, etc. — include funds that are not so readily available, such as time deposits and other long-term investments.

In addition to steering a country's economy through treacherous waters, a central bank often serves as supervisor of the country's banking and financial system. In most countries, the central bank is given a considerable degree of independence to carry out these duties effectively and efficiently. In the United States, for example, the president appoints the head of the Federal Reserve, but from that moment on the government has no significant say in how the Fed regulates the money supply and oversees the financial stability of the country.

In some countries, the central bank also takes on additional responsibilities. The Bank of England, for example, is responsible for printing the money as well as supervising the banking system. The European Central Bank, based in Frankfurt, oversees the monetary policy for all countries in the euro zone, but is limited in how much it can intervene in any one country's economic affairs. In the United States, the U.S. Treasury borrows money for the government's use by issuing treasury notes and bonds, while the Federal Reserve Board charts monetary policy and oversees the printing of money at the Bureau of Engraving and Printing. The Bank of Japan issues the government's checks and holds its deposits of foreign currency. Some central banks, such as the Swiss National Bank, are partly owned by private shareholders, which means that monetary policy isn't necessarily influenced by what's best for the country at large, but by what's best for the central bank's shareholders.

During times of acute financial turbulence, central banks usually act as a “lender of last resort” in order to preserve the stability of the country's financial system.

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