What's the Purpose of Central Banks? - dummies

What’s the Purpose of Central Banks?

Central banks, like the Federal Reserve in the United States, are designed to make sure that their respective domestic economies run as smoothly as possible. In most countries, central banks are expected at the very least to combat inflationary pressures.

The overarching goal of the central banks is to repeal (or keep in check) the boom and bust cycles in the global economy. So far this goal is only an intention, because boom and bust cycles remain in place and are now referred to as the business cycle.

One good impact has come from the actions of the Federal Reserve and other central banks. They’ve been able to lengthen the amount of time between boom and bust cycles to the extent that they’ve smoothed out volatile trends and created an environment in which the futures markets offer a perfect vehicle for hedging and speculation.

Before the advent of central banks, booms and busts in the global economy came about as often as every harvest season. Because money was hard to come by prior to the centralization of the global economies, a bad harvest, a spell of bad weather, or just a bad set of investment decisions by a local bank in a farming community could devastate the economy in an area or even a country.

The Federal Reserve, or Fed, is the prototype central bank, because of its relative success, not because it was the first central bank. Created in 1913 to stabilize the activities of the money and credit markets, it administers the Federal Reserve Act, which mandated the creation of an agency intent on “improving the supervision” of banking and “creating an elastic currency.”

The current objectives of the Fed are to fight inflation and maintain full employment to keep the consumption-based U.S. and global economies moving.