The Supply of Money. Historically, changes in the
quantities of certain commodities such as gold affected
the supply of money. That relationship is no longer true.
At least since the
early 1970s, central
banks have affected the
nominal quantities of
money in modern economies,
whether intentionally
or not, through
their policy actions.
These policy actions may
include buying and selling
government securities,
changing reserve
requirements, or changing
the interest rate at
which the central bank
provides reserves to
financial intermediaries.
How does the Federal Reserve affect the nominal
quantity of money in the United States? The basic principles
are simple, but details can blur them. Suppose that
all money in the United States were currency. The Federal
Reserve could buy and sell government securities as it
does now in open market operations, using currency
rather than deposits to pay for the securities. When the
Federal Reserve bought government securities with currency,
the amount of currency held by the public would
increase. When the Federal Reserve sold government
securities and received currency in exchange, the amount
of currency held by the public would decrease. These
changes in the amount of currency would be changes in
the nominal quantity of money in the economy. While
simplified, this example of such purchases and sales