Central banking 101 for newbies (like me)

Hello saithe here 😀 I don't consider myself an expert on the on banking or financial markets in general so if you find any discrepancies in my work please feel free to call me out in the comments.

IMG source

I just want to share to everyone what universities won't care in teaching you about money. I was shocked when my professor in finance (I'm from the Philippines by the way) rebutted my report on how regular money is a kind of fiat currency. (She thinks fiat is only applicable to monopoly money). So I will post the questions that I my self asked when researching about central banks.

An introduction

IMG source

What exactly are central banks?

Central banks are government institutions (usually) that controls the supply of money through bank regulations and controling the interest rate. They do this by storing foreign currencies, storing gold and buying government bonds.

There is most likely a law detailing which institutions the central banks can only deal with. Central banks may or may not be directly controlled by the government. In most countries central banks are the only institution authorized to print money.

Q.1) Why is the interest rate of the central bank at 1.25% while my loan is at 4.5%?

While it is true that central banks do supply the money, they do it by lending them to banks. Central banks charge regular banks interest at very low rates. Regular banks then circulate it to the economy by lending it to us at a premium.

Q.2) What does "stimulus package" really mean?

Stimulus package is a fancy term for printing money. Governments can do this by borrowing money (issuing bonds) or by outright printing them. Since most governments believe on top down economics, they will most likely lend it (at discount rates) to corporations or use the funds to bail out failing banks or corporations.

IMG source

Q.3) Fiat? Isn't it monopoly money?

Fiat is any type of currency that is not backed by any commodity (cotton) or by previous metals(gold,silver). The value of the currency is gauranteed by the strength of the country's economic output and its dominance in global trade. The value of the money is then dictated by the overall monetary supply and interest rate which is open to currency manipulation. Since governments all over the world are printing money to boost their GDPs, fiat currency in general losses purchasing power over time.

Q.4) If the gold standard was so darn good why switch to fiat?

It is basically because of money shortage created by loaning wartorn countries of WW2. More often than not, gold producing countries have more favorable rates than those who merely store them. Gold also prevent banks from "Deficit Spending" by locking the amount of money to the supply of gold. The only downside that I can truly see is that government can't spend more money in times of crises (that stimulus package)

Reference:
source1(central bank)

source2(how central bank create money)

source(fiat currency)

If you think I missed some points in my post, please feel free to call me out on the comments below. Thanks you for reading my post 😀