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As gold was deposited in Goldsmiths vaults, they had to create accurate recording systems, like those of our Federal and States Banking system, to receive, safe keep, and retrieve of gold. Realizing that little of the King’s gold stored in his vault was used for making jewelries, a Goldsmith, though was caught loaning out gold, could have amazed and convinced the King that the latter would make huge profits by loaning out with interest, money or notes 10 times of the actual gold deposit.
Goldsmith used a fraction of gold deposit as reserve to create 10 times of money ; he might unwittingly laid the ground for today fractional-reserve banking in which public’s demand deposits, instead of gold, is used to create or multiply money for loan, hence the term Money Multiplier. As more loans, especially teaser loans, were released, more pronounced would be the side effect. When borrowers could not cope with higher interest rate in the later date of their loans, the flow of money was affected; this disrupted the economy during year 2008 and thus affected workers thereafter.
The FED Monetary policy uses product/service price, employment, and economic growth to influence the supply and cost of money and credit in the nation’s economy. FED uses 3 flexible means to manage the monetary system for economic stability: buying/selling government securities in the Open Market Operations, the discount rate, and reserve requirement. Colander said money supply and inflation/interest rate are FED Intermediate Target; stable price, maximum employment, and moderate long term interest rate Ultimate Target. Taylor's rule recommends FED to set interest rate moderately higher or lower when inflation is above or below its target respectively.
Printing new money without economic growth is the cause of high inflation rate of a Banana Republic.