The Invention of Money

Often when people think of money they conjure up images of piles of gold coins and stacks of hundred dollar bills locked away in a bank vault. But money is more than just paper currency and coins. Sometimes we write out checks to pay for rent. Sometimes we use our debit cards or bank accounts to pay bills online. When we write checks or use our debit cards there isn't some behind-the-scenes process where cash moves from one place to another — in reality just some numbers in a few computers get changed around. Weird huh?

So if money is such an abstract idea, why are we all willing to work for it? What makes it so valuable? This week we are learning about the somewhat surprising truth behind the role of money in our modern economy. The truth is much more mysterious.

Listen to the five clips below, selected from This American Life's episode "The Invention of Money," to complete this case study.

This American Life — Episode 423: The Invention of Money (transcript)

Assignment

Listen to the clips above and then respond to the following questions. The word counts provided are guidelines — you're welcome to use more words, but if you use fewer you risk not answering in sufficient detail to receive full credit.

Type your responses in a word processing platform like Word or Pages and save your submission as a PDF file. Turn in your response to the assignment folder by the due date for full credit.

1. In the opening clip, reporter Jacob Goldstein is trying to understand where all the lost money went during the financial crisis. He asks his business-savvy aunt "Where did all that money go?" and her response is "Money is fiction." What does she mean by saying that "money is fiction"? (200 words)
2. The Federal Reserve (the Fed) is the central bank of the United States with the power to create money. When the Fed decides to increase the money supply by creating more money, how do they go about doing this? What role do banks play in this process? What is it that the Federal Reserve buys and sells to achieve their goal? Where does the money come from to pay for all their purchases? (250 words)
3. During the financial crisis the Federal Reserve bought mortgage-backed securities. Why did they do this? How much money were they mandated to purchase these securities — how far off were they? (150 words)