Overview of the Financial System

An effective financial system is a complex mix of government and policy makers, a monetary system, financial institutions, and financial markets that interact to expedite the flow of financial capital from savings into investment. Depicts a simplified view of the U.S, financial system. First, an effective financial system must have several sets of policy makers who pass laws and make decisions relating to fiscal and monetary policies. These policies makers include the President, Congress, the U.S, Treasurer, and the federal Reserve Board. Since the U.S operates within a global economy, political and economic actions of foreign policy makers impact, although indirectly, on the U.S financial system and its operations.
          Second, an effective financial system needs an efficient monetary system for creating and transferring money. Third, an effective financial system also must have financial institutions that support capital formation either by channeling savings into investment in physical assets or by fostering direct financial investments by individuals in financial institutions and businesses. We refer to these activities as the savings-investment process. Fourth, an effective financial system must have financial markets that facilitate the transfer of financial assets among individuals, institutions, businesses, and governments.
          The monetary system must provide an efficient medium for exchanging goods and services. A way to measure prices, called a unit of account, is a basic requirement. The unit of account in the United States is the U.S dollar. The unit of account must be universally accepted if exchange is to function smoothly.