 Long ago, in the middle of a very big ocean, there was a very small island called Mazuma. Mazuma was ruled by a very wise king named Old King Bomba. Old King Bomba had not always been the king, however. Originally, he was Mazuma's lifeguard. In fact, Bomba had been a very good lifeguard. He was always rescuing shipwrecked travelers. The rescued people were of course very grateful to Bomba, and tended to look up to him. One reason they looked up to him was that he spent so much time sitting high up on his lifeguard chair. Anyway, because they looked up to him so much, they decided he should be the king of Mazuma. King Bomba was very proud of his little island and the people who lived on it. They worked hard, and they all had useful skills. Mr. and Mrs. Wingit had been trapeze artists in the circus. They supplied the island with coconuts and bananas. Blossom Frisbee, another member of the Mazuma community, had been a florist. Now she was in charge of growing and selling the island's flowers. Unfortunately, Blossom was allergic to certain types of flowers, and if she wasn't careful, she would find herself sneezing. Then there was Captain Sharky, the fisherman. Captain Sharky had lost his fishing boat, but he was very good at using a net or a spear. He traded for his nets with the island's net maker, knacked the net, and traded for his spears with Spike the Spearmaker. Then there was Dr. Millicent Diligent. King Bomba had rescued her when her hospital ship had gone down and helped her collect all her medical supplies. Now Dr. Diligent kept everyone from getting sick by conducting frequent examinations. And there was Bloomfield. Bloomfield was an artist who liked to paint, play the violin, and write songs. Bloomfield spent a lot of his time on the banks of Mazuma's only river, the Mazuma Zippy. There he collected little shiny stones. Bloomfield's greatest enjoyment was in painting his favorite initials on these little stones. D for delightful, I for imagination, M for mineral, and E for Eureka, which means I have found it. E-I-M-E were the initials, so Bloomfield called each one a dime. Bloomfield thought his dimes looked very pretty, and so he kept trying to trade them for food and clothing and other necessities. But no one wanted to trade for Bloomfield's dimes. Meanwhile, all of the other residents of Mazuma went on happily trading with each other. Well, not always so happily, because sometimes the trading got very complicated. One day it got especially complicated. That was the day when Captain Sharky and Dr. Millicent Diligent decided to get married. It should be a beautiful wedding, Sharky, with lots and lots of flowers. Well, there's only one thing to do, Millicent. Let's go trade with Blossom Frisbee. And so off they went. Blossom greeted them with two... Achoo! Achoo! ...or three... Achoo! ...quick sneezes. For our wedding, Blossom, Dr. Diligent and I would like lots and lots of your very best flowers. In exchange, I'm prepared to offer you ten of my very finest fish. Thanks all the same, Sharky, but I already have more fish that I need. Well then, I know what, Blossom. What? I can give you a complete range of free injections and booster shots. They'll protect you against everything from mesouma measles to albatross pox. That would be a fair trade, wouldn't it? Oh, very fair, Dr. Diligent. But what I could really use is a mosquito net. Why don't you go trade for a net? From that, the net. Then bring it to me, and I'll trade you my flowers for the net. That sounds like a good idea, Sharky. Let's go see Nat. But it turned out that Nat didn't need any fish just then either, and he certainly didn't want any injections. However, he was short of coconut milk. I've got it, my friends. Why don't you go find the wingits and trade them your fish for their coconuts? Then bring me the coconuts, and you can have the net. And so Sharky and Dr. Diligent went off to find the wingits. They found them way up in a very high tree. Hello there, Mr. and Mrs. Wingit. We'd like to trade you some nice fresh fish for some of your coconuts. I'm sorry to disappoint the two of you, but Mr. Wingit and I don't need any fish just now. But we could use a new spear to break open our coconuts with. If you could trade for the spear, then you could trade with us for the coconuts. So once again, Captain Sharky and Dr. Diligent set off to try to make a trade. But by this time, they were getting tired, so they sat down on the riverbank and tried to figure it all out. Let's see. If Spike trades us a spear for our fish, then we can trade the spear for the coconuts. Then the coconuts for the net, and then the net for the flowers for the wedding. Oh, I only wish there were a simpler way. Just then, who should come along but Bloomfield and King Bamba? Sharky and Dr. Diligent didn't look very happy for people who were getting married, so King Bamba asked them what was wrong. Oh, nothing much, King Bamba. It's just our usual problem with trading. You see, King Bamba, both Sharky and I want lots of flowers for our wedding. But Blossom doesn't need Sharky's fish, and she doesn't want my shots. However, she can use a net to keep out mosquitoes. Anyway, King Bamba, to make a long story short, if Spike will trade a spear for my fish, then we can trade the spear for some coconuts. The coconuts for a net, and the net for the flowers. That certainly does seem like a lot of trouble to go through. Just to get your flowers. I really wish there was some way of getting the things we need without going through this complicated trading. You know what we need, King Bamba? We need some kind of item that everyone on Mazuma would accept. Something we could all use to make trade easier. Why not fish? Well, I'm not so sure, Sharky. Wouldn't fish be a bit inconvenient to carry around? Yes, you're right, King Bamba. And then, too, fish don't keep very well. Then Dr. Diligent spoke up. We need something that's small, that's easy to carry, and that doesn't smell bad after a few days. Thanks, Dr. Diligent. That gives me a wonderful idea. Why not Bloomfield's dimes? They're small, they're light, and they're easy to carry around. There's just one problem. Anyone who wanted to cheat could just pick up some of these stones and paint D-I-M-E on them. But nobody would know my secrets for getting just the right colors. Don't worry, no one can imitate my dimes. Yes, this sounds as if it might really work. Let's call all the others together and see what they think. And so, Mazuma held its first conference on money. Everyone discussed the idea of trading with Bloomfield's painted stones, and afterwards, Bloomfield began to issue the first official Mazuma dimes. Soon, whenever people wanted anything, they didn't have to worry about going from one person to another to get a satisfactory trade. Money had been invented. All the Mazuma residents had to do now was to pay the right number of dimes, and they could get whatever they wanted. And on an evening in June, after Captain Sharkey and Dr. Diligent received their flowers and had a beautiful wedding, everyone was so happy that they sat around having coconut flambé with King Bomba and singing Bloomfield's latest song on the banks of the Mazuma Zippy far away. We left our friends on Mazuma singing a song and taking life easy. Well, now it's ten years later, and things have changed just a little. What happened, you see, was that Mazuma was discovered by an ocean liner sailing around the world. All the tourists liked the island so much that when they got back home, they told all their friends about it. Before long, Mazuma's little harbor was crowded with ships bringing people who wanted to live on this unspoiled island paradise. King Bomba was kept busy settling disputes and trying to keep everyone happy. But the big problem was for Mazuma's residents to buy and sell the things they needed using nothing except Bloomfield's dimes. For big purchases, it just took too many of them. What are we going to do about the dime problem, Bloomfield? It just takes too many of them for big purchases. Funny that you should mention that, King Bomba, because this big green tree in my backyard, the one we're both standing under, is a mint tree. And I think it may be the answer. Well, I must say it smells nice, Bloomfield, but how would it solve a problem? Well, you see, King Bomba, I've always used its bright green leaves as a dye for my green paint. So why not use the mint tree to dye some of our stones this special green color? Then they'll be worth more than our dimes. Not only that, but they'll smell good. You may have something there, Bloomfield. Why don't we give it a try? The next day, Bloomfield built a fence around the mint tree. Then he started dyeing bigger stones with the bright green color that came from the mint tree. He proudly showed one to King Bomba and explained that it was worth ten dimes. It's not only pretty, King Bomba, it's bright. In fact, I call it a brighter because it's brighter than anything on the island. You know, Bloomfield, I'm afraid it's a little too bright. Couldn't you make your brighter a little duller? Duller, eh? Very well, King Bomba, I'll make it less shiny, and instead of calling it a brighter, I'll call it a duller. But it'll still be worth ten dimes. Sounds like a good name to me, Bloomfield. Why don't you go ahead and start printing them? You mean minting them, Your Majesty? After all, this is now the Mazuma Mint. Before long, Bloomfield was turning out one dollar stones, five dollar stones, ten dollar stones, and twenty dollar stones. The Mazuma Mint was in full operation. People were very happy with the new coins. They were much more convenient than the dimes because you didn't need as many of them. Still, they were a bit heavy to carry around. Then, at the weekly community meeting, someone came up with the idea of using paper instead of stones so that Mazuma's money would be lighter. That seemed like a good idea. So, King Bomba suggested that Bloomfield issue both stone dollars and paper dollars so that people could have their choice. Bloomfield still had one question. What shall we call the paper dollars? Immediately, everyone began to holler out suggestions. Climb up! Head back! This upset King Bomba. I wish they wouldn't holler. Did you say dollar, King Bomba? That sounds like a good name. I said holler. No need to holler, Your Majesty. Dollar is a fine name. The paper dollars, which were light and easy to carry around, proved to be very popular. In fact, they were so popular that soon Mazuma's shops and industries began to get very busy. And as people made a profit from their business or received their pay, they began looking full of place to put their extra money. King Bomba had an idea. What we need is a location that's quiet, restful and dignified. Why not the river bank, Your Majesty? That's a quiet, dignified and restful location. Yes, maybe we could build a storage house for our extra money down there. And so Mazuma got its first place to store money. It was called a bank and it got its name from being on the bank of the river. And for a time, everyone was happy keeping money in the river bank. Of course, it was a little inconvenient to go to the bank, draw out your money and go make a purchase. Bloomfield kept trying to think of a simpler way. Then one day he got an idea that really started with King Bomba being too ill to get out of bed. King Bomba needed some money for the doctor. So he wrote a letter to Bloomfield at the bank and asked Sharky the fisherman to deliver it personally. The letter said Bloomfield should draw out $20 from King Bomba's bank account to pay the doctor with. When Sharky showed up at the bank and presented the letter, Bloomfield didn't know quite what to think. But he saw that it was from King Bomba and had the official seal of Mazuma. So he handed Sharky the $20. There you go, Sharky. Thanks a lot, Bloomfield. King Bomba will really appreciate it. You know, come to think of it, this is a good way of paying people what you owe them. You should give it some thought. Thanks, Sharky. I will give it some thought. After Sharky left, Bloomfield really did give it some thought. You know, Sharky's right. That is a good way of paying people what you owe them. People wouldn't have to come to the bank nearly as often if we just let them write us letters when they needed money. In fact, if one of them wanted to pay the florist or the doctor or anybody at all, he could do just what King Bomba did. He could just write the amount on a piece of paper. Then, here at the bank, we could subtract that amount from his records and add it to the records of the other person. Hmm, let me just see. So Bloomfield got out the records, called accounts, of two people who had money stored at the bank. Sam Simoleon and Lulu Spondulik. Now, let's suppose Sam writes in and says he wants to pay Lulu $20 he borrowed from her. Well, I get out Sam's account and then I take away $20 from his account and then I add $20 to Lulu's account. It works. Now, if I just knew what to call my system of using little pieces of paper, I'll have to check around and see. I could check with Sharky, check with Natanet, or even check with... check. Check. Hmm, maybe check is the name I'm looking for. Yes, check is the perfect name for money that requires a signature. It's short, neat, and business-like. Now, what should it look like? After all, it doesn't have to be as long as a letter. It could just be a small piece of paper giving important facts. Yes, why not just that? Before long, Bloomfield had finished his design for a check. There we are. All you have to do is write the date, the name of the person you're paying, the amount, and your signature. And that's it. Not bad. Not bad at all, even if I do say so myself. And the people of Missouma agreed with him. Before long, people were paying most of their bills by check and only carrying around cash for little things like hamburgers and apple turnovers. Since Bloomfield was in charge of the bank, he was now called a banker. Bloomfield the banker. He handled Missouma's money, which was made up of both cash and checking accounts. Then one day, Bloomfield got involved in something new. Lending money. That was the day when Natanet came in and asked for a loan. You see, Bloomfield, my net business has really grown a lot in the last ten years. I have people who supply me with the cords and poles I need to build my nets. But right now, I'm sure that money and the cord makers and the pole suppliers refuse to supply me with their cords and poles. Really Nat, that's quite a problem. It sure is, Bloomfield. They're just not satisfied with my promise to pay them after I sell my next batch of nets. They don't want to wait that long. So, Bloomfield, I need to borrow some money if I'm going to stay in business. Bloomfield thought about it a moment. Nat, I'll tell you what I'm going to do. I'm going to make you a loan by adding $1,000 to your checking account. However, I'll have to add an interest charge for the loan. But you can use the money right away. That's great, Bloomfield. That's incredible. Thanks a lot. Now I can write checks to the cord makers and pole suppliers and get my cords and poles. The cord makers and the pole suppliers in turn were glad to accept the checks Nat wrote to them for payment. After all, check deposits are money. Before long, Bloomfield was making loans to many people. As a result, new buildings and new houses began going up very fast. New soda fountains too. When King Bomba saw everything going so well for the people of Mazuma, he was very happy. Money had developed. It had begun with dimes, had progressed to dollars and now included checking accounts. After a while, other people started banks in other parts of the island and lent money. Soon, things were really humming. Now let's see. Where did we leave off? Oh yes, Mazuma had gotten its new banks and everything was humming along. Then after a while, something unexpected began to happen. Prices began increasing. Everything cost more, you see, because everyone had more money than before. People were willing to pay more and prices went up, up, up. Yes, prices went up for marbles, cracker jacks, sneakers, bicycles and almost everything. And when the prices of most things go up, what's that called? That's right, inflation. So with inflation getting worse and worse, ice cream was so expensive the island's children could hardly afford their favorite desserts. Even banana splits, which had always been quite cheap on Mazuma, owing to the large supply of bananas, became very expensive. Naturally, the children were unhappy, so they went to see the Minister of Just Desserts. This was only a part-time job and the office was open only one hour a week. Oh yes, the Minister of Just Desserts was Bloomfield. After the children had made an appointment with him and were sitting in the office reserved for the Minister of Just Desserts, they kept asking two questions. Why are prices so high? Why does ice cream cost so much? Perhaps it'll help us understand if we look at what's been happening with Spike the Spearmaker. Spike makes one high quality spear a week. Spike used to sell a spear for $100, but now people have more money and the price has been going up. I was visiting Spike the other day when several people came by who wanted to buy spears. One shopper offered him $110 and then another offered $120. Then a third shopper offered $125 and got the spear. So now Spike's price is $125. So you see when the people of Mazuma have more money than they used to and the same amount of things to buy prices go up for almost everything. They're willing to pay more and therefore the people who sell things tend to charge more. And that's how it is with ice cream and other desserts. Even if you think ice cream is too expensive if a lot of people are willing to pay more the price will go up. One of the children spoke up. It just doesn't seem fair. I know it doesn't seem fair but that's how it is with the money for people to spend. With dollars growing faster than the amount of things to buy you get higher prices. Then a little girl raised her hand. Minister Bloomfield my name is Gwendolyn Gwendolyn and my father here is the president of Mazuma Second River Bank. Anyway I'd like to talk about an idea I had that might help explain everything. Each year you see my mother buys me new shoes because my feet keep growing after all if my shoes are too small my feet will suffer. Then if they're too big well then it's just like the time when I tried to wear my mother's shoes. I tripped and they fell off. Oh I see what you're getting at Gwendolyn. Just as your growing feet need the right fit with shoes Mazuma's growing economy needs the right fit with money. That's it? Of course it can't be as exact a fit as we get with shoes but one way to help might be to keep bank lending from growing too fast. You know Bloomfield that may be just the answer or maybe if we could keep down the total amount that all the banks lend that would help solve the problem of too much money. I suppose if we set up our money and didn't lend it that would work. But we'd need someone to give us guidance and set up rules wouldn't we? Exactly Bloomfield. But who? Well daddy why don't you get King Bomba to set up a special bank to help you control the money supply. Hey that sounds like a terrific idea doesn't it George? That might just work Bloomfield. Why don't we go talk with King Bomba? King Bomba liked the idea and so did the citizens of Mazuma and soon Mazuma had its first central bank it was a bank that could influence the total amount that banks could lend. Its name was the Federal Reserve. Before long with the new central bank in operation the banks had to slow down their lending. Gradually prices quit rising so fast and inflation slowed down. Gwendolyn Grendel in recognition of her contributions was named the new Minister of Just Desserts and Bloomfield presented his new words to the old song on the banks of the Mazuma Zippy. Now the song was called In the Banks on the Mazuma Zippy Bloomfield passed out copies of the words and everyone sang along. Prices climb up higher than the palm trees and the dollar buys a little Lassie's Day. Lassie's Day. Then it's time the Federal Reserve made lending harder for the banks of Mazuma far away. Far away. Hey, wait a second Bloomfield. What happens when there isn't enough money? What will the Federal Reserve do then? I'm glad you asked that Gwendolyn. Next verse everyone. Then the Fed will try to get the money going by releasing a little more to the banks each day. Then the banks can lend out all the needed money and our economy will grow. Now that's okay. Oh, there's money in the banks of the Mazuma Zippy and there's really only one big thing to say. The Federal Reserve must try to keep the money balanced in the banks of Mazuma far away. So there boys and girls you have the story of Mazuma. The story of how the little island kingdom of King Bomba grew into a modern economy as money replaced trading. As banks were developed first as store houses for money and then as operators of the check system and then as lenders. And of course it's also the story of how the Federal Reserve for central bank tries to make sure the banks don't lend too much or too little. Now some of you may like the Mazuma system so much you will write to King Bomba and ask if there's room for you and your friends in his little island kingdom but wait hold on in America you see we've been using the Mazuma system for many years. That's right right here in America. Of course America is much much larger than Mazuma and therefore things are a lot more complicated and getting the right fit of money for the economy is a far more difficult job but basically the idea is the same. Ours is also an interesting story and in its way two begins once upon a dime.