WEBVTT 00:00:06.372 --> 00:00:07.964 If you tried to pay for something 00:00:07.964 --> 00:00:09.439 with a piece of paper, 00:00:09.439 --> 00:00:11.374 you might run into some trouble. 00:00:11.374 --> 00:00:13.357 unless, of course, the piece of paper 00:00:13.357 --> 00:00:15.335 was a hundred dollar bill. 00:00:15.335 --> 00:00:17.128 But what is it that makes that bill 00:00:17.128 --> 00:00:18.832 so much more interesting and valuable 00:00:18.832 --> 00:00:20.793 than other pieces of paper? 00:00:20.793 --> 00:00:23.357 After all, there's not much you can do with it. 00:00:23.357 --> 00:00:25.079 You can't eat it. 00:00:25.079 --> 00:00:26.446 You can't build things with it. 00:00:26.446 --> 00:00:29.064 And burning it is actually illegal. 00:00:29.064 --> 00:00:30.871 So what's the big deal? 00:00:30.871 --> 00:00:33.029 Of course, you probably know the answer. 00:00:33.029 --> 00:00:35.069 A hundred dollar bill is printed by the government 00:00:35.069 --> 00:00:37.484 and designated as official currency, 00:00:37.484 --> 00:00:40.190 while other pieces of paper are not. 00:00:40.190 --> 00:00:42.356 But that's just what makes them legal. 00:00:42.356 --> 00:00:45.038 What makes a hundred dollar bill valuable, on the other hand, 00:00:45.038 --> 00:00:48.035 is how many or few of them are around. 00:00:48.035 --> 00:00:50.086 Throughout history, most currency, 00:00:50.086 --> 00:00:51.496 including the US dollar, 00:00:51.496 --> 00:00:53.523 was linked to valuable commodities 00:00:53.523 --> 00:00:55.376 and the amount of it in circulation 00:00:55.376 --> 00:00:58.671 depended on a government's gold or silver reserves. 00:00:58.671 --> 00:01:01.954 But after the US abolished this system in 1971, 00:01:01.954 --> 00:01:05.786 the dollar became what is known as fiat money, 00:01:05.786 --> 00:01:08.221 meaning not linked to any external resource 00:01:08.221 --> 00:01:11.183 but relying instead solely on government policy 00:01:11.183 --> 00:01:13.644 to decide how much currency to print. 00:01:13.644 --> 00:01:16.606 So which branch of our government sets this policy? 00:01:16.606 --> 00:01:19.596 The executive, the legislative, or the judicial? 00:01:19.596 --> 00:01:22.068 The surprising answer is none of the above! 00:01:22.068 --> 00:01:24.619 In fact, monetary policy is set 00:01:24.619 --> 00:01:26.825 by an independent Federal Reserve System, 00:01:26.825 --> 00:01:28.576 or The Fed, 00:01:28.576 --> 00:01:30.414 made up of 12 regional banks 00:01:30.414 --> 00:01:32.619 in major cities around the country. 00:01:32.619 --> 00:01:33.954 Its board of governors, 00:01:33.954 --> 00:01:35.450 which is appointed by the president 00:01:35.450 --> 00:01:36.619 and confirmed by the Senate, 00:01:36.619 --> 00:01:38.121 reports to Congress, 00:01:38.121 --> 00:01:41.619 and all the Fed's profit goes into the US treasury. 00:01:41.619 --> 00:01:43.499 But to keep the Fed from being influenced 00:01:43.499 --> 00:01:45.786 by the day to day vicissitudes of politics, 00:01:45.786 --> 00:01:49.262 it is not under the direct control of any branch of government. 00:01:49.262 --> 00:01:50.980 So why doesn't the Fed just decide 00:01:50.980 --> 00:01:52.416 to print infinite hundred dollar bills 00:01:52.416 --> 00:01:53.616 to make everyone happy and rich? 00:01:53.616 --> 00:01:56.895 Well, because then the bills wouldn't be worth anything. 00:01:56.895 --> 00:01:59.020 Think about the purpose of currency, 00:01:59.020 --> 00:02:01.856 which is to be exchanged for goods and services. 00:02:01.856 --> 00:02:04.036 If the total amount of currency in circulation 00:02:04.036 --> 00:02:07.585 increases faster than the total value of goods and services 00:02:07.585 --> 00:02:08.818 in the economy, 00:02:08.818 --> 00:02:10.578 then each individual piece will be able 00:02:10.578 --> 00:02:13.244 to buy a smaller portion of those things than before. 00:02:13.244 --> 00:02:15.586 This is called inflation. 00:02:15.586 --> 00:02:16.676 On the other hand, 00:02:16.676 --> 00:02:18.227 if the money supply remains the same, 00:02:18.227 --> 00:02:20.618 while more goods and services are produced, 00:02:20.618 --> 00:02:22.588 each dollar's value would increase 00:02:22.588 --> 00:02:24.841 in a process known as deflation. 00:02:24.841 --> 00:02:26.640 So which is worse? 00:02:26.640 --> 00:02:27.847 Too much inflation 00:02:27.847 --> 00:02:29.751 means that the money in your wallet today 00:02:29.751 --> 00:02:31.065 will be worth less tomorrow, 00:02:31.065 --> 00:02:32.931 making you want to spend it right away. 00:02:32.931 --> 00:02:34.879 So, while this would stimulate business, 00:02:34.879 --> 00:02:37.037 it would also encourage overconsumption, 00:02:37.037 --> 00:02:39.899 or hoarding commodities, like food and fuel, 00:02:39.899 --> 00:02:41.644 raising their prices 00:02:41.644 --> 00:02:45.704 and leading to consumer shortages and even more inflation. 00:02:45.704 --> 00:02:47.666 But deflation would make people 00:02:47.666 --> 00:02:49.120 want to hold onto their money, 00:02:49.120 --> 00:02:51.033 and a decrease in consumer spending 00:02:51.033 --> 00:02:52.591 would reduce business profits, 00:02:52.591 --> 00:02:54.078 leading to more unemployment 00:02:54.078 --> 00:02:55.954 and a further decrease in spending, 00:02:55.954 --> 00:02:58.251 causing the economy to keep shrinking. 00:02:58.251 --> 00:02:59.870 So most economists believe that 00:02:59.870 --> 00:03:01.918 while too much of either is dangerous, 00:03:01.918 --> 00:03:04.255 a small, consistent amount of inflation 00:03:04.255 --> 00:03:07.787 is necessary to encourage economic growth. 00:03:07.787 --> 00:03:10.258 The Fed uses vast amounts of economic data 00:03:10.258 --> 00:03:13.621 to determine how much currency should be in circulation, 00:03:13.621 --> 00:03:15.599 including previous rates of inflation, 00:03:15.599 --> 00:03:16.904 international trends, 00:03:16.904 --> 00:03:18.739 and the unemployment rate. 00:03:18.739 --> 00:03:20.467 Like in the story of Goldilocks, 00:03:20.467 --> 00:03:22.233 they need to get the numbers just right 00:03:22.233 --> 00:03:24.619 in order to stimulate growth and keep people employed, 00:03:24.619 --> 00:03:27.694 without letting inflation reach disruptive levels. 00:03:27.694 --> 00:03:29.068 The Fed not only determines 00:03:29.068 --> 00:03:32.533 how much that paper in your wallet is worth 00:03:32.533 --> 00:03:34.700 but also your chances of getting or keeping the job 00:03:34.700 --> 00:03:36.402 where you earn it.