Question

1. 1. Why do central bank exist in every capitalist economy? Does a capitalist economy need one? Why or why not?
2. 2. What backs the US dollar?

Answer 1

1) A central bank is a central monetary authority . It is an institution that manages money supply , interest rate , foreign transactions etc . It is the apex bank that manages all other commercial banks . In a capitalist country , in order to maintain financial balance , central bank is necessary . The central bank is the controller of every commercial bank , it implements the monetary policies and manages inflation , exchange rate , reserves . Most importantly it supervises the whole banking system of the country . Capitalism cannot thrive without a sound banking system since loanable funds or capital is the primary resource driving capitalism . These functions performed by a central bank ensures a suitable environment for capitalism to grow . It also ensures economic stability and growth . Yes a capitalist economy surely requires a central bank . Capitalists are profit making individuals who require economic stability for setting up their business . This stability is ensured by the central bank .

2) US Dollar is a kind of fiat money which is regulated by the government through the Federal Reserve or the central bank . Fiat money can be defined as inconvertible paper money or legal tender money . Government decree makes it legal tender . It has nothing to back it but debt . Dollar used to be backed by precious metals ( gold / silver ) but it changed in 1971 due to Nixon shock .