Welcome to today’s Tiny MBA topic: The Federal Reserve.
Definition: The Federal Reserve
The Federal Reserve is the most important bank in the U.S., and the ‘banker’ for all the other banks in the U.S.
Story: The Federal Reserve and Monopoly:
You know the game Monopoly? Well, imagine a huge room where a hundred games of monopoly are being played. Each game has its own banker and cash. And then there’s a central bank where all the bankers can go for more cash if they need it. Think of the Federal Reserve as that central bank.
Why would the Monopoly bankers need more cash? Maybe more players joined the games. Maybe a few big winners started hoarding cash, leaving not enough for everybody else. There’s lots of reasons.
The “Fed,’ as the Federal Reserve is called, can authorize new money to be issued and loaned to these other banks, and decide how much ‘interest’ it will charge for those loans. When it lowers the interest rate, the Fed makes it easier for everyone to get more cash.
Where does the Federal Reserve get this extra money? It just authorizes the printing of more! It’s the only bank in the U.S. that can do that.
Sometimes, the reverse happens. The Fed realizes there’s too much cash out there, which is causing problems. Maybe the prices of the Monopoly deals being done have gotten out of control, leading to fights and frustration. Maybe the people playing Monopoly aren’t taking money as seriously anymore because they have too much of it.
In that case, the Federal Reserve can ‘tighten up’ the cash supply circulating in the Monopoly room, by hiking the interest rate it charges the other bankers, forcing them to give cash back to the Fed.
Of course none of this really happens in Monopoly, because there’s no Federal Reserve in Monopoly.
But in real life, you’ll hear a lot about the Federal Reserve. In the past few decades, the Fed has been a very aggressive player in the U.S. economy, pumping trillions of dollars of extra cash into the system to try to keep the world economy humming along smoothly.
How will this work out? People really have no idea. But as in Monopoly… you never know exactly how the game’s going to go, so just keep paying attention!
Tiny MBA is my occasional series of short stories illustrating business concepts for kids.