Editing Monetary policy (section)

=== 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>