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Money

ishes when the term expires. If the Fed wishes to drain But what if the cobbler did not want your peaches? In
reserves temporarily from the banking system, it can that case you would have to find out what he did want, for
adopt a matched sale-purchase transaction (a reverse example, beef. Then you would have to trade your peaches
repo), under which the buyer agrees to sell the securities for beef and the beef for shoes. But what if the person sell-
back to the Fed, usually in fewer than seven days. ing beef had no desire for peaches, but instead wants a
computer? Then you would have to trade your peaches for
SEE ALSO Federal Reserve System; International Monetary a computer—and it would take a lot of peaches to buy a
Fund; Macroeconomics/Microeconomics computer. Then you would have to trade your computer
for beef and the beef for shoes. But what if … ? At some
BIBLIOGRAPHY point it would become easier to make the shoes yourself
Bernanke, Ben S. (2005, March 30). Implementing monetary or to just do without.
policy (Federal Reserve Board Member speech). Retrieved
January 23, 2006, from http://www.federalreserve.gov/
THE EVOLUTION OF MONEY
boarddocs/speeches/2005/20050330/default.htm
Money evolved as a way of avoiding the complexities and
Bernanke, Ben S. (2004, December 2). The logic of monetary
policy (Federal Reserve Board Member speech). Retrieved difficulties of barter. Money is any asset that is recognized
January 23, 2006, from http://www.federalreserve.gov/ by an economic community as having value. Historically,
boarddocs/speeches/2004/20041202/default.htm such assets have included, among other things, shells,
Bies, Susan S. (2004, October 23). The Federal Reserve System stone disks (which can be somewhat difficult to carry
and the economy (Federal Reserve Board Member speech). around), gold, and bank notes.
Retrieved January 23, 2006, from The modern monetary system has its roots in the
http://www.federalreserve.gov/boarddocs/speeches/2004/2004 gold of medieval Europe. In the Middle Ages, gold and
1023/default.htm
gold coins were the common currency. However, the
The Federal Reserve System: Purposes and functions. (2005, wealthy found that carrying large quantities of gold
June). Washington, DC: Board of Governors of the Federal around was difficult and made them the target of thieves.
Reserve System.
To avoid carrying gold coins, people began depositing
Mishkin, Frederic S. (2006). The economics of money, banking, them for safekeeping with goldsmiths, who often had
and financial markets (7th ed.). New York: Pearson-Addison- heavily guarded vaults in which to store their valuable
Wesley.
inventories of gold. The goldsmiths charged a fee for their
91st Annual Report: 2004. (2005). Washington, DC: Board of services and issued receipts, or gold notes, in the amount
Governors of the Federal Reserve System.
of the deposits. Exchanging these receipts was much sim-
Treasury Bulletin. (2005, September). Washington, DC: U.S. pler and safer than carrying around gold coins. In addi-
Department of Treasury. tion, the depositors could retrieve their gold on demand.

Goldsmiths during this time became aware that few
Edward Wei-Te Hsieh people actually wanted their gold coins back when the
gold notes were so easy to use for exchange. They there-
fore began lending some of the gold on deposit to borrow-
ers who paid a fee, called interest. These goldsmiths were
MONEY the precursors to our modern fractional reserve banking
system.
In the modern world we take money for granted. How-
ever, pause for a moment and imagine what life would be
like without money. Suppose that you want to consume a FUNCTIONS OF MONEY
particular good or service, such as a pair of shoes. If Regardless of what asset is recognized by an economic
money did not exist, you would need to barter with the community as money, in general it serves three functions:
cobbler for the pair of shoes that you want. Barter is the • Money is a medium of exchange
process of directly exchanging one good or service for
another. In order to purchase the pair of shoes, you would • Money is a measure of value
need to have something to trade for the shoes. If you spe- • Money is a store of value
cialized in growing peaches, you would need to bring
enough bushels of peaches to the cobbler’s shop to pur- Money is a medium of exchange. Used as a medium of
chase the pair of shoes. If the cobbler wanted your peaches exchange, money means that parties to a transaction no
and you wanted his shoes, then a double coincidence of longer need to barter one good for another. Because
wants would exist and trade could take place. money is accepted as a medium of exchange, you can sell

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