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An interactive U.S. Monetary System simulator that allows users to model and stress-test the U.S. monetary system through dynamic 'what-if' economic scenarios.

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Glossary of U.S. Monetary Terms

Plain-English definitions of the ideas and institutions behind the dollar, from the gold standard to quantitative easing

B

Bank of the United States: The First Bank of the United States (1791–1811) was a federally chartered national bank proposed by Alexander Hamilton. It held government deposits, issued banknotes, and restrained state banks by returning their notes for payment in gold or silver. The Second Bank of the United States (1816–1836) played a similar role until President Andrew Jackson vetoed its recharter.
Bank run: A bank run happens when many depositors withdraw their money at once because they fear the bank will fail. Banks hold only part of their deposits as cash, so a fast enough run can bring down even a solvent bank. Runs can spread to other banks through panic and fire sales of assets, a process called contagion.
Bretton Woods system: The Bretton Woods system was the international monetary order agreed in 1944. Other currencies were pegged to the U.S. dollar at adjustable rates, and foreign governments could convert dollars into gold at $35 an ounce. It also created the IMF and the World Bank, and lasted until the United States ended gold convertibility in 1971.

C

Central bank: A central bank is the institution that issues a country's currency, sets its monetary policy, and acts as banker to the government and to commercial banks. The Federal Reserve is the central bank of the United States.
Contagion: Contagion is the spread of financial distress from one institution or market to others. It travels through direct links such as loans between banks, through fire sales that push down asset prices, and through panic that makes people doubt similar institutions.

D

De-globalization: De-globalization is the reversal of global economic integration: trade, investment and finance between countries shrink or reorganize along political lines instead of expanding. It can happen through tariffs and reshoring, restrictions on capital flows and sanctions, a smaller role for the U.S. dollar as the world's reserve currency, rival payment systems to SWIFT, and competing blocs for energy, food and critical minerals. For the United States it matters because a large current-account deficit is how dollars flow abroad to be reinvested in Treasury securities. If that recycling shrinks, the government may have to pay more to borrow. Monetary Model's De-Globalization Simulator models these five channels and tests how each historical U.S. monetary regime would hold up.
Deflation: Deflation is a sustained fall in the general price level. It raises the real burden of debts and can lead people to postpone spending, which may deepen a downturn. The United States experienced severe deflation during the Great Depression.
Deposit insurance: Deposit insurance is a government guarantee that bank deposits will be repaid up to a limit even if the bank fails. In the United States it is provided by the Federal Deposit Insurance Corporation (FDIC), created in 1933, and it reduces the incentive for bank runs.
Discount window: The discount window is the Federal Reserve facility through which banks can borrow short-term funds directly from their regional Reserve Bank, usually against collateral. It is the Fed's traditional lender-of-last-resort tool.

E

Exchange rate: An exchange rate is the price of one currency in terms of another. Under a fixed or pegged exchange rate the government holds the price steady; under a floating exchange rate the market sets it. Major currencies have floated against the dollar since 1973.

F

Federal funds rate: The federal funds rate is the interest rate banks charge each other for overnight loans of reserves. The Federal Open Market Committee sets a target range for it, and because other short-term rates follow it, it is the main lever of U.S. monetary policy.
Federal Open Market Committee (FOMC): The FOMC is the Federal Reserve body that sets U.S. monetary policy, including the target range for the federal funds rate. It has twelve voting members: the seven Board governors, the president of the New York Fed, and four other Reserve Bank presidents who serve on a rotating basis.
Federal Reserve: The Federal Reserve is the central bank of the United States, created by the Federal Reserve Act of 1913 after repeated banking panics. It consists of a Board of Governors in Washington and twelve regional Reserve Banks, and it is charged with pursuing maximum employment and stable prices.
Fiat money: Fiat money is currency that has value because a government declares it legal tender and people accept it, not because it can be exchanged for gold or another commodity. The U.S. dollar has been a fully fiat currency since 1971.
Fiscal policy: Fiscal policy is the government's use of spending, taxation and borrowing to influence the economy. In the United States it is set by Congress and the President, while monetary policy is set by the Federal Reserve.
Fractional-reserve banking: Fractional-reserve banking is a system in which banks keep only a fraction of their deposits as reserves and lend or invest the rest. It lets banks expand credit and the money supply, but it also leaves them exposed to runs.

G

Gold standard: A gold standard is a monetary system in which the currency is defined as a fixed weight of gold and can be exchanged for it. The United States was on a gold standard for most of the period from 1879 to 1933, and kept a restricted international link to gold until 1971.
Greenbacks: Greenbacks were paper notes the U.S. government issued during the Civil War under the Legal Tender Act of 1862. They were not backed by gold or silver, which made them the country's first large-scale fiat currency. Their convertibility into gold was restored in 1879.

I

Inflation: Inflation is a sustained rise in the general price level, which means each dollar buys less over time. In the United States it is commonly measured by the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) price index. The Federal Reserve targets 2% PCE inflation.
Interest on reserve balances: Interest on reserve balances is the rate the Federal Reserve pays banks on the reserves they hold at the Fed. Since banks will not lend reserves for less than they can earn at the Fed, this rate is now the Fed's main tool for steering the federal funds rate.

L

Lender of last resort: A lender of last resort is an institution, usually the central bank, that lends to solvent banks during a panic when no one else will. Its purpose is to stop runs and contagion. Providing this backstop was a central reason the Federal Reserve was created.

M

Monetary policy: Monetary policy is how a central bank manages interest rates and the supply of money and credit to influence inflation, employment and financial stability. The Federal Reserve conducts U.S. monetary policy.
Money supply: The money supply is the total amount of money in an economy. M1 counts currency and highly liquid deposits; M2 adds savings deposits, small time deposits and retail money market funds. Faster money growth than the economy can absorb tends to raise inflation over time.

N

National Banking Acts: The National Banking Acts of 1863 and 1864 created federally chartered national banks that issued a uniform currency backed by U.S. government bonds. A tax on state banknotes drove those notes out of circulation. Because the currency could not expand in a panic, the system suffered repeated crises until the Federal Reserve was founded.
Nixon Shock: The Nixon Shock was President Richard Nixon's announcement on August 15, 1971 that the United States would stop converting dollars into gold for foreign governments. It also imposed a wage and price freeze and a 10% import surcharge, and it effectively ended the Bretton Woods system.

O

Open market operations: Open market operations are the Federal Reserve's purchases and sales of securities, mainly Treasury securities, in the open market. Buying adds reserves to the banking system and selling removes them. They were the Fed's main tool for steering interest rates before 2008.

Q

Quantitative easing (QE): Quantitative easing is large-scale buying of longer-term securities, such as Treasury bonds and mortgage-backed securities, by a central bank using newly created reserves. It is used when short-term rates are already near zero, to push down long-term rates. The Federal Reserve used QE after 2008 and again in 2020.

R

Real interest rate: The real interest rate is the nominal interest rate minus expected inflation. It measures the true cost of borrowing and the true return on saving, and it is what drives spending and investment decisions.
Reserve requirement: A reserve requirement is the minimum share of certain deposits a bank must hold as reserves. It was historically one of the Federal Reserve's policy tools. The Fed reduced reserve requirements to zero in March 2020.
Reserves: Reserves are the balances commercial banks hold in their accounts at the Federal Reserve, plus the cash in their vaults. Banks use reserves to settle payments with each other, and the Fed can create or remove them.

S

Stagflation: Stagflation is the combination of high inflation with weak growth and high unemployment. The United States experienced it in the 1970s. It is hard to fight because raising rates to reduce inflation can deepen the slump.
Stock-flow consistent model: A stock-flow consistent model is a macroeconomic model in which every financial flow is recorded on the balance sheet of some sector, so every payment has a payer and a receiver and no money appears or disappears by accident. Monetary Model's simulation engine is built on this approach.

T

Treasury securities: Treasury securities are debt issued by the U.S. Treasury to finance government borrowing. They include bills (up to one year), notes (two to ten years) and bonds (twenty or thirty years), and they are widely treated as the world's safest dollar asset.

V

Volcker disinflation: The Volcker disinflation was the Federal Reserve's campaign under Chair Paul Volcker, beginning in October 1979, to break double-digit inflation by sharply restricting money growth. Interest rates rose to record levels and the economy went through recessions, but inflation fell from about 14% in 1980 to under 4% by 1983.

Y

Yield curve: The yield curve plots the interest rates of bonds of the same credit quality, usually Treasury securities, from short to long maturities. It normally slopes upward. When short-term rates rise above long-term rates the curve is "inverted", which has often preceded U.S. recessions.