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If you tried to pay for something[br]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[br]was a hundred dollar bill.

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But what is it that makes that bill[br]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[br]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[br]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[br]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,[br]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[br]or silver reserves.

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But after the US abolished[br]this system in 1971,

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the dollar became[br]what is known as fiat money,

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meaning not linked[br]to any external resource

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but relying instead solely[br]on government policy

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to decide how much currency to print.

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Which branch of our government[br]sets this policy?

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The Executive, the Legislative,[br]or the Judicial?

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The surprising answer is:[br]none of the above!

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In fact, monetary policy is set[br]by an independent Federal Reserve System,

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or the Fed,

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made up of 12 regional banks[br]in major cities around the country.

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Its board of governors,

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which is appointed by the president[br]and confirmed by the Senate,

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reports to Congress,

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and all the Fed's profit[br]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[br]vicissitudes of politics,

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

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Why doesn't the Fed just decide[br]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[br]wouldn't be worth anything.

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Think about the purpose of currency,

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which is to be exchanged[br]for goods and services.

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If the total amount[br]of currency in circulation

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increases faster than the total value[br]of goods and services in the economy,

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then each individual piece will be able

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to buy a smaller portion[br]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[br]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[br]will be worth less tomorrow,

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making you want to spend it right away.

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While this would stimulate business,[br]it would also encourage overconsumption,

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or hoarding commodities,[br]like food and fuel,

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raising their prices

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and leading to consumer shortages[br]and even more inflation.

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But deflation would make people[br]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[br]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[br]while too much of either is dangerous,

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a small, consistent amount of inflation[br]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[br]should be in circulation,

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including previous rates of inflation,

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international trends,[br]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[br]and keep people employed,

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without letting inflation[br]reach disruptive levels.

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The Fed not only determines

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how much that paper[br]in your wallet is worth

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but also your chances[br]of getting or keeping the job

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where you earn it.