 So you know how you're always asking about the Federal Reserve? No? Oh. No questions at all? Okay. Okay. Let's start there. That's Ben Bernanke. He's the Chairman of the Federal Reserve, or the Fed. The Fed is, basically, America's national bank. This means that it makes loans to the U.S. Treasury, processes government checks and bonds, collects all payments, like taxes, and holds accounts the government can use to make deposits. These accounts are important. The Fed is required by law to hold some form of collateral for every dollar in circulation. Some of it is in gold. Most of it is in bonds or other government securities, which means, basically, the dollar is a promise to pay backed by another promise to pay. This is important to remember when you think about monetary policy, which may be one of the most important things the Fed does. Monetary policy is how the government attempts to control inflation and unemployment. The Fed's mission, by law, is to assure stable prices and low unemployment. The target they aim for is around 2% inflation and 5% unemployment. Now before we go any further, let's stop for a second and discuss what inflation is exactly. Inflation is money losing its purchasing power over time. One sign of this is when prices rise sharply. This can happen because everyone loses faith in the value of their money, or for other reasons. For example, if the government printed a trillion dollars tomorrow, people wouldn't sell as much milk to you at the same price as before. Because there would be more dollars than before, but the same amount of milk, if their price stayed the same, they would come out behind when they sold to you. At the end of the day, money is only as valuable as people's belief in it, which is why promises to pay can be backed with other promises to pay, or IOUs. I have tried that in my own life though, and it never seems to fly. The Fed's chief method to control inflation is by setting interest rates for the transfers of money between banks. Banks move a lot of money back and forth between each other, and this basically controls how much interest you get for borrowing or loaning money, at least indirectly. Changing the interest rates keeps banks from doing too much loaning, and it affects how much money there is overall. It's tricky because a little inflation is actually good for the economy, while no inflation at all, or too much inflation, can interfere with economic growth. The Fed can also affect inflation by selling government debt, or by setting the rules for how much money a bank has to keep in its vaults at all times. More money in the vault means less that can be loaned out. The Fed can also loan money directly to banks or other financial institutions. This helps money move around, especially when the banks won't lend directly to each other, like during a financial crisis. One of the Fed's most important jobs is to loan out money when no other banks will, so the economy doesn't freeze up. The Fed also controls the electronic systems that banks use to transfer money between each other. Before there was an electronic system, the government had to print bills in large denominations, so large sums could be loaned back and forth, which is why you read about huge bills in the past, like the $10,000 bill. The Fed distributes the cash to the U.S. Mint prints, but only 8% of the nation's money is estimated to be in actual physical cash. Aside from monitoring the stability of the economy and the flow of money, the Fed also regulates banks and financial institutions, along with the regular federal government agencies that do it, like the SEC, the FDIC, the CFTC, and the Treasury. The Fed's part of this is to ensure that banks are stable, which involves measuring what assets and loans the bank holds, how risky they are, how the bank's procedures work, how easy it is to convert the bank's assets to cash, and other similar factors. The Fed is also required by law to review banks in low-income areas to make sure that they give out the same percentage of loans to poor customers as they take in from them in deposits. This law was passed in the 1990s because Congress believed that the banks were taking poor customers' money, but then refusing to give them any loans. So that is, in a nutshell, what the Fed does. And there you have it.