Editing Monetary policy (section)

==History==

[[File:Billets de 5000.jpg|left|thumb|Banknotes with a face value of 5000 in different currencies ([[United States dollar]], [[Central African CFA franc]], [[Japanese yen]], [[Italian lira]], and [[French franc]])]]

=== Issuing coin===
Monetary policy has evolved over the centuries, along with the development of a money economy. Historians, economists, anthropologists and numismatics do not agree on the origins of money. In the West the common point of view is that coins were first used in [[ancient Lydia]] in the 8th century BCE, whereas some date the origins to [[ancient China]]. The earliest predecessors to monetary policy seem to be those of [[debasement]], where the government would melt coins down and mix them with cheaper metals. The practice was widespread in the late [[Roman Empire]], but reached its perfection in western Europe in the late [[Middle Ages]].<ref>Bordo, M.D. (2018). Monetary Policy, History of. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. Retrieved August 15, 2023.</ref>

For many centuries there were only two forms of monetary policy: altering coinage or the printing of [[paper money]]. [[Interest rates]], while now thought of as part of [[monetary authority]], were not generally coordinated with the other forms of monetary policy during this time. Monetary policy was considered as an executive decision, and was generally implemented by the authority with [[seigniorage]] (the power to coin). With the advent of larger trading networks came the ability to define the currency value in terms of gold or silver, and the price of the local currency in terms of foreign currencies. This official price could be enforced by law, even if it varied from the market price.
[[File:Hue-tzu (Song Dynasty government issue), 1023 - John E. Sandrock.jpg|left|thumb|Reproduction of a [[Song dynasty]] note, possibly a [[Jiaozi (currency)|Jiaozi]], redeemable for 770 ''mò'']]
Paper money originated from [[promissory notes]] termed "[[Jiaozi (currency)|jiaozi]]" in 7th-century [[China]]. Jiaozi did not replace metallic currency, and were used alongside the copper coins. The succeeding [[Yuan dynasty]] was the first government to use paper currency as the predominant circulating medium. In the later course of the dynasty, facing massive shortages of specie to fund war and maintain their rule, they began printing paper money without restrictions, resulting in [[hyperinflation]].

=== Central banks and the gold standard ===

With the creation of the [[Bank of England]] in 1694,<ref>{{cite web|url=http://www.bankofengland.co.uk/about/pages/history/|title=History of the Bank of England – Bank of England|access-date=2015-03-21|archive-date=2019-07-16|archive-url=https://web.archive.org/web/20190716145305/https://www.bankofengland.co.uk/error/404.html?item=%2Fabout%2Fpages%2Fhistory%2F&user=boe%5CAnonymous&site=boe|url-status=dead}}</ref> which was granted the authority to print notes backed by gold, the idea of monetary policy as independent of executive action{{how|date=May 2020}} began to be established.<ref name = "bank_england">{{cite news|url=https://www.bbc.co.uk/history/timelines/britain/stu_eng_bank.shtml|publisher=BBC|title=Bank of England founded 1694|date=March 31, 2006}}</ref> The purpose of monetary policy was to maintain the value of the coinage, print notes which would trade at par to specie, and prevent coins from leaving circulation. During the period 1870–1920, the industrialized nations established central banking systems, with one of the last being the [[Federal Reserve]] in 1913.<ref name = "fedact">{{cite news|url=http://www.federalreserve.gov/generalinfo/fract/|publisher=Federal Reserve Board|title=Federal Reserve Act|date=May 14, 2003}}</ref> By this time the role of the central bank as the "[[lender of last resort]]" was established. It was also increasingly understood that interest rates had an effect on the entire economy, in no small part because of appreciation for the [[Marginal utility#Marginal Revolution|marginal revolution]] in economics, which demonstrated that people would change their decisions based on changes in their [[Trade-off|opportunity costs]].

The establishment of national banks by industrializing nations was associated then with the desire to maintain the currency's relationship to the [[gold standard]], and to trade in a narrow [[currency band]] with other gold-backed currencies. To accomplish this end, central banks as part of the gold standard began setting the interest rates that they charged both their own borrowers and other banks which required money for liquidity. The maintenance of a gold standard required almost monthly adjustments of interest rates.

The gold standard is a system by which the price of the national currency is fixed vis-a-vis the value of gold, and is kept constant by the government's promise to buy or sell gold at a fixed price in terms of the base currency. The gold standard might be regarded as a special case of "fixed exchange rate" policy, or as a special type of commodity price level targeting. However, the policies required to maintain the gold standard might be harmful to employment and general economic activity and probably exacerbated the Great Depression in the 1930s in many countries, leading eventually to the demise of the gold standards and efforts to create a more adequate monetary framework internationally after [[World War II]].<ref name="Historical">{{cite web |title=Federal Reserve Board - Historical Approaches to Monetary Policy |url=https://www.federalreserve.gov/monetarypolicy/historical-approaches-to-monetary-policy.htm |website=Board of Governors of the Federal Reserve System |access-date=12 August 2023 |language=en |date=8 March 2018}}</ref> Nowadays the gold standard is no longer used by any country.<ref>{{cite web |last=Abdel-Monem |first=Tarik |title=What is The Gold Standard? |url=http://www.uiowa.edu/ifdebook/faq/faq_docs/gold_standard.shtml |publisher=University of Iowa Center for The Center for International Finance and Development |url-status=dead |archive-url=https://web.archive.org/web/20091121143147/http://www.uiowa.edu/ifdebook/faq/faq_docs/gold_standard.shtml |archive-date=2009-11-21 }}</ref>

=== Fixed exchange rates prevailing ===

In 1944, the [[Bretton Woods system]] was established, which created the [[International Monetary Fund]] and introduced a fixed exchange rate system linking the currencies of most industrialized nations to the US dollar, which as the only currency in the system would be directly convertible to gold.<ref>{{cite web |title=About the IMF: History: Cooperation and reconstruction (1944–71) |url=https://www.imf.org/external/about/histcoop.htm |website=www.imf.org |access-date=12 August 2023}}</ref> During the following decades the system secured stable exchange rates internationally, but the system broke down during the 1970s when the dollar increasingly came to be viewed as overvalued. In 1971, the dollar's convertibility into gold was suspended. Attempts to revive the fixed exchange rates failed, and by 1973 the major currencies began to float against each other.<ref>{{cite web |title=About the IMF: History: The end of the Bretton Woods System (1972–81) |url=https://www.imf.org/external/about/histend.htm |website=www.imf.org |access-date=12 August 2023}}</ref> In Europe, various attempts were made to establish a regional fixed exchange rate system via the [[European Monetary System]], leading eventually to the [[Economic and Monetary Union of the European Union]] and the introduction of the currency [[euro]].

=== Money supply targets ===

[[Monetarist]] economists long contended that the money-supply growth could affect the macroeconomy. These included [[Milton Friedman]] who early in his career advocated that [[government budget deficit]]s during recessions be financed in equal amount by [[money creation]] to help to stimulate [[aggregate demand]] for production.<ref>{{cite journal |last=Friedman |first=Milton |year=1948 |title=A Monetary and Fiscal Framework for Economic Stability |journal=[[American Economic Review]] |volume=38 |issue=3 |jstor=1810624 |pages=245–264 }}</ref> Later he advocated simply increasing the monetary supply at a low, constant rate, as the best way of maintaining low inflation and stable production growth.<ref>{{Cite book | first = Milton | last = Friedman | author-link = Milton Friedman | title = A Program for Monetary Stability | publisher = Fordham University Press | year = 1960 }}</ref> During the 1970s inflation rose in many countries caused by the [[1970s energy crisis]], and several central banks turned to a money supply target in an attempt to reduce inflation. However, when U.S. [[Federal Reserve]] Chairman [[Paul Volcker]] tried this policy, starting in October 1979, it was found to be impractical, because of the unstable relationship between monetary aggregates and other macroeconomic variables, and similar results prevailed in other countries.<ref name="Historical"/><ref>{{cite web | first = Ben | last = Bernanke | author-link = Ben Bernanke | title = Monetary Aggregates and Monetary Policy at the Federal Reserve: A Historical Perspective | publisher = Federal Reserve | year = 2006 | url = http://www.federalreserve.gov/newsevents/speech/bernanke20061110a.htm }}</ref> Even Milton Friedman later acknowledged that direct money supplying was less successful than he had hoped.<ref>{{cite report |doi=10.2139/ssrn.958933 |title=Milton Friedman and U.S. Monetary History: 1961–2006 |year=2007 |last1=Nelson |first1=Edward |s2cid=154734408 |url=https://files.stlouisfed.org/files/htdocs/publications/review/07/05/Nelson.pdf }}</ref>

=== Inflation targeting ===

In 1990, New Zealand as the first country ever adopted an official [[inflation target]] as the basis of its monetary policy. The idea is that the central bank tries to adjust interest rates in order to steer the country's inflation rate towards the official target instead of following indirect objectives like exchange rate stability or money supply growth, the purpose of which is normally also ultimately to obtain low and stable inflation. The strategy was generally considered to work well, and central banks in most [[developed countries]] have over the years adapted a similar strategy.<ref name=Holdingline>{{cite web |title=Inflation Targeting: Holding the Line |url=https://www.imf.org/external/pubs/ft/fandd/basics/72-inflation-targeting.htm |website=www.imf.org |access-date=12 August 2023}}</ref>

The Global Financial Crisis of 2008 sparked controversy over the use and flexibility of the inflation targeting employed. Many economists argued that the actual inflation targets decided upon were set too low by many monetary regimes. During the crisis, many inflation-anchoring countries reached the lower bound of zero rates, resulting in inflation rates decreasing to almost zero or even deflation.<ref name="Feenstra, Robert C. 2012"/>

As of 2023, the central banks of all [[G7]] member countries can be said to follow an inflation target, including the [[European Central Bank]] and the [[Federal Reserve]], who have adopted the main elements of inflation targeting without officially calling themselves inflation targeters.<ref name=Holdingline/> In emerging countries fixed exchange rate regimes are still the most common monetary policy.<ref name=IMF>{{cite book |last1=Department |first1=International Monetary Fund Monetary and Capital Markets |title=Annual Report on Exchange Arrangements and Exchange Restrictions 2022 |date=26 July 2023 |publisher=International Monetary Fund |isbn=979-8-4002-3526-9 |url=https://www.elibrary.imf.org/display/book/9798400235269/9798400235269.xml?code=imf.org |access-date=12 August 2023 |language=en }}</ref>

<gallery mode="packed">
File:BankofFinlandSuomenPankkiFinlandsBank.jpg|The [[Bank of Finland]], in [[Helsinki]], established in 1812
File:Basel - Bank für internationalen Zahlungsausgleich3.jpg|The headquarters of the [[Bank for International Settlements]], in [[Basel]] ([[Switzerland]])
File:RBI-Tower.jpg|The [[Reserve Bank of India]] (established in 1935) headquarters in [[Mumbai]]
File:Central Bank of Brazil.jpg|The [[Central Bank of Brazil]] (established in 1964) in [[Brasília]]
File:Banco de España (Madrid) 06.jpg|The [[Bank of Spain]] (established in 1782) in [[Madrid]] 
</gallery>