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If you tried to pay for something

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with a piece of paper,

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you might run into some trouble.

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unless, of course, the piece of paper

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was a hundred dollar bill.

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But what is it that makes that bill

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so much more interesting and valuable

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than other pieces of paper?

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After all, there's not much you can do with it.

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You can't eat it.

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You can't build things with it.

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And burning it is actually illegal.

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So what's the big deal?

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Of course, you probably know the answer.

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A hundred dollar bill is printed by the government

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and designated as official currency,

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while other pieces of paper are not.

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But that's just what makes them legal.

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What makes a hundred dollar bill valuable, on the other hand,

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is how many or few of them are around.

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Throughout history, most currency,

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including the US dollar,

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was linked to valuable commodities

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and the amount of it in circulation

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depended on a government's gold or silver reserves.

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But after the US abolished this system in 1971,

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the dollar became what is known as fiat money,

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meaning not linked to any external resource

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but relying instead solely on government policy

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to decide how much currency to print.

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So which branch of our government sets this policy?

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The executive, the legislative, or the judicial?

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The surprising answer is none of the above!

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In fact, monetary policy is set

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by an independent Federal Reserve System,

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or The Fed,

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made up of 12 regional banks

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in major cities around the country.

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Its board of governors,

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which is appointed by the president

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and confirmed by the Senate,

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reports to Congress,

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and all the Fed's profit goes into the US treasury.

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But to keep the Fed from being influenced

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by the day to day vicissitudes of politics,

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it is not under the direct control of any branch of government.

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So why doesn't the Fed just decide

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to print infinite hundred dollar bills

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to make everyone happy and rich?

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Well, because then the bills wouldn't be worth anything.

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Think about the purpose of currency,

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which is to be exchanged for goods and services.

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If the total amount of currency in circulation

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increases faster than the total value of goods and services

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in the economy,

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then each individual piece will be able

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to buy a smaller portion of those things than before.

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This is called inflation.

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On the other hand,

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if the money supply remains the same,

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while more goods and services are produced,

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each dollar's value would increase

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in a process known as deflation.

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So which is worse?

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Too much inflation

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means that the money in your wallet today

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will be worth less tomorrow,

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making you want to spend it right away.

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So, while this would stimulate business,

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it would also encourage overconsumption,

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or hoarding commodities, like food and fuel,

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raising their prices

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and leading to consumer shortages and even more inflation.

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But deflation would make people

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want to hold onto their money,

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and a decrease in consumer spending

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would reduce business profits,

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leading to more unemployment

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and a further decrease in spending,

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causing the economy to keep shrinking.

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So most economists believe that

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while too much of either is dangerous,

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a small, consistent amount of inflation

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is necessary to encourage economic growth.

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The Fed uses vast amounts of economic data

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to determine how much currency should be in circulation,

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including previous rates of inflation,

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international trends,

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and the unemployment rate.

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Like in the story of Goldilocks,

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they need to get the numbers just right

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in order to stimulate growth and keep people employed,

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without letting inflation reach disruptive levels.

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The Fed not only determines

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how much that paper in your wallet is worth

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but also your chances of getting or keeping the job

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where you earn it.