1 00:00:06,372 --> 00:00:07,964 If you tried to pay for something 2 00:00:07,964 --> 00:00:09,439 with a piece of paper, 3 00:00:09,439 --> 00:00:11,374 you might run into some trouble. 4 00:00:11,374 --> 00:00:13,357 unless, of course, the piece of paper 5 00:00:13,357 --> 00:00:15,335 was a hundred dollar bill. 6 00:00:15,335 --> 00:00:17,128 But what is it that makes that bill 7 00:00:17,128 --> 00:00:18,832 so much more interesting and valuable 8 00:00:18,832 --> 00:00:20,793 than other pieces of paper? 9 00:00:20,793 --> 00:00:23,357 After all, there's not much you can do with it. 10 00:00:23,357 --> 00:00:25,079 You can't eat it. 11 00:00:25,079 --> 00:00:26,446 You can't build things with it. 12 00:00:26,446 --> 00:00:29,064 And burning it is actually illegal. 13 00:00:29,064 --> 00:00:30,871 So what's the big deal? 14 00:00:30,871 --> 00:00:33,029 Of course, you probably know the answer. 15 00:00:33,029 --> 00:00:35,069 A hundred dollar bill is printed by the government 16 00:00:35,069 --> 00:00:37,484 and designated as official currency, 17 00:00:37,484 --> 00:00:40,190 while other pieces of paper are not. 18 00:00:40,190 --> 00:00:42,356 But that's just what makes them legal. 19 00:00:42,356 --> 00:00:45,038 What makes a hundred dollar bill valuable, on the other hand, 20 00:00:45,038 --> 00:00:48,035 is how many or few of them are around. 21 00:00:48,035 --> 00:00:50,086 Throughout history, most currency, 22 00:00:50,086 --> 00:00:51,496 including the US dollar, 23 00:00:51,496 --> 00:00:53,523 was linked to valuable commodities 24 00:00:53,523 --> 00:00:55,376 and the amount of it in circulation 25 00:00:55,376 --> 00:00:58,671 depended on a government's gold or silver reserves. 26 00:00:58,671 --> 00:01:01,954 But after the US abolished this system in 1971, 27 00:01:01,954 --> 00:01:05,786 the dollar became what is known as fiat money, 28 00:01:05,786 --> 00:01:08,221 meaning not linked to any external resource 29 00:01:08,221 --> 00:01:11,183 but relying instead solely on government policy 30 00:01:11,183 --> 00:01:13,644 to decide how much currency to print. 31 00:01:13,644 --> 00:01:16,606 So which branch of our government sets this policy? 32 00:01:16,606 --> 00:01:19,596 The executive, the legislative, or the judicial? 33 00:01:19,596 --> 00:01:22,068 The surprising answer is none of the above! 34 00:01:22,068 --> 00:01:24,619 In fact, monetary policy is set 35 00:01:24,619 --> 00:01:26,825 by an independent Federal Reserve System, 36 00:01:26,825 --> 00:01:28,576 or The Fed, 37 00:01:28,576 --> 00:01:30,414 made up of 12 regional banks 38 00:01:30,414 --> 00:01:32,619 in major cities around the country. 39 00:01:32,619 --> 00:01:33,954 Its board of governors, 40 00:01:33,954 --> 00:01:35,450 which is appointed by the president 41 00:01:35,450 --> 00:01:36,619 and confirmed by the Senate, 42 00:01:36,619 --> 00:01:38,121 reports to Congress, 43 00:01:38,121 --> 00:01:41,619 and all the Fed's profit goes into the US treasury. 44 00:01:41,619 --> 00:01:43,499 But to keep the Fed from being influenced 45 00:01:43,499 --> 00:01:45,786 by the day to day vicissitudes of politics, 46 00:01:45,786 --> 00:01:49,262 it is not under the direct control of any branch of government. 47 00:01:49,262 --> 00:01:50,980 So why doesn't the Fed just decide 48 00:01:50,980 --> 00:01:52,416 to print infinite hundred dollar bills 49 00:01:52,416 --> 00:01:53,616 to make everyone happy and rich? 50 00:01:53,616 --> 00:01:56,895 Well, because then the bills wouldn't be worth anything. 51 00:01:56,895 --> 00:01:59,020 Think about the purpose of currency, 52 00:01:59,020 --> 00:02:01,856 which is to be exchanged for goods and services. 53 00:02:01,856 --> 00:02:04,036 If the total amount of currency in circulation 54 00:02:04,036 --> 00:02:07,585 increases faster than the total value of goods and services 55 00:02:07,585 --> 00:02:08,818 in the economy, 56 00:02:08,818 --> 00:02:10,578 then each individual piece will be able 57 00:02:10,578 --> 00:02:13,244 to buy a smaller portion of those things than before. 58 00:02:13,244 --> 00:02:15,586 This is called inflation. 59 00:02:15,586 --> 00:02:16,676 On the other hand, 60 00:02:16,676 --> 00:02:18,227 if the money supply remains the same, 61 00:02:18,227 --> 00:02:20,618 while more goods and services are produced, 62 00:02:20,618 --> 00:02:22,588 each dollar's value would increase 63 00:02:22,588 --> 00:02:24,841 in a process known as deflation. 64 00:02:24,841 --> 00:02:26,640 So which is worse? 65 00:02:26,640 --> 00:02:27,847 Too much inflation 66 00:02:27,847 --> 00:02:29,751 means that the money in your wallet today 67 00:02:29,751 --> 00:02:31,065 will be worth less tomorrow, 68 00:02:31,065 --> 00:02:32,931 making you want to spend it right away. 69 00:02:32,931 --> 00:02:34,879 So, while this would stimulate business, 70 00:02:34,879 --> 00:02:37,037 it would also encourage overconsumption, 71 00:02:37,037 --> 00:02:39,899 or hoarding commodities, like food and fuel, 72 00:02:39,899 --> 00:02:41,644 raising their prices 73 00:02:41,644 --> 00:02:45,704 and leading to consumer shortages and even more inflation. 74 00:02:45,704 --> 00:02:47,666 But deflation would make people 75 00:02:47,666 --> 00:02:49,120 want to hold onto their money, 76 00:02:49,120 --> 00:02:51,033 and a decrease in consumer spending 77 00:02:51,033 --> 00:02:52,591 would reduce business profits, 78 00:02:52,591 --> 00:02:54,078 leading to more unemployment 79 00:02:54,078 --> 00:02:55,954 and a further decrease in spending, 80 00:02:55,954 --> 00:02:58,251 causing the economy to keep shrinking. 81 00:02:58,251 --> 00:02:59,870 So most economists believe that 82 00:02:59,870 --> 00:03:01,918 while too much of either is dangerous, 83 00:03:01,918 --> 00:03:04,255 a small, consistent amount of inflation 84 00:03:04,255 --> 00:03:07,787 is necessary to encourage economic growth. 85 00:03:07,787 --> 00:03:10,258 The Fed uses vast amounts of economic data 86 00:03:10,258 --> 00:03:13,621 to determine how much currency should be in circulation, 87 00:03:13,621 --> 00:03:15,599 including previous rates of inflation, 88 00:03:15,599 --> 00:03:16,904 international trends, 89 00:03:16,904 --> 00:03:18,739 and the unemployment rate. 90 00:03:18,739 --> 00:03:20,467 Like in the story of Goldilocks, 91 00:03:20,467 --> 00:03:22,233 they need to get the numbers just right 92 00:03:22,233 --> 00:03:24,619 in order to stimulate growth and keep people employed, 93 00:03:24,619 --> 00:03:27,694 without letting inflation reach disruptive levels. 94 00:03:27,694 --> 00:03:29,068 The Fed not only determines 95 00:03:29,068 --> 00:03:32,533 how much that paper in your wallet is worth 96 00:03:32,533 --> 00:03:34,700 but also your chances of getting or keeping the job 97 00:03:34,700 --> 00:03:36,402 where you earn it.