US Paper Currency

Morning everyone.

Today, for this introductory series on the monetary system, we’re going to discuss US paper currency: what it is, where it comes from, who enforces counterfeiting laws, and what the punishment for counterfeiting is. But, before we get to all of that, let’s begin with a review of some lies that the media, politicians and orthodox economists peddle to the general public.

The first, most pernicious lie is that the US government “can run out of money”. In short, the US government’s budget is just like a household’s. To dispel this myth that has festered into “fact” over the years, we begin by asking a question: If the US government’s budget is just like a household’s, then how many households are you aware of that operate a currency manufacturing facility? Keep this question in mind, because it will be part of today’s discussion.

The second lie concerns federal taxation. We hear that the US government taxes hard-working decent Americans, then takes those tax dollars and throws them at lazy moochers, corporations, the Pentagon, and various other things that people do not wish to support. No such thing exists. Federal taxes are not collected from any Americans, rich or otherwise, and then spent by the US government. Every federal tax dollar leaves the economy forever when it is taxed. The reason for this, is because there are no gold reserves to defend any more. Under the gold standard, the federal government agreed to convert on demand, US Dollars to gold and so, it had to tax to spend, because it was forced to ensure that amount of currency in circulation was in keeping with the supply of gold on hand. By spending the tax dollars collected, no new currency was introduced. Therefore, the gold reserves were defended. What happens when you remove the gold peg? Well, that action changes everything.

The purpose of federal taxation is, first and foremost, to create a demand for US Dollars. The US government is the supreme authority in the United States. There is no higher earthly power in the United States. The US government is given exclusive authority to issue US Dollars, to levy taxes, and to punish anyone who tries to counterfeit US currency by the U.S. Constitution, Article 1 Section 8:

“To coin Money, regulate the Value thereof,”

“The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises,”

“To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;”

When the US government lays a tax, it demands that tax be payable only in US Dollars, and so, the private sector needs to get ahold of US Dollars. When it sells goods and services to the US government, the US government decides the price it will pay in its own currency for those goods and services and then buys them with its own currency. Now, the private sector has US Dollars. To maintain that demand, the US government takes tax enforcement very seriously. As long and the US government can enforce tax collections, there will always be a demand for US Dollars.

Another purpose of federal taxation today is the reduction of private sector spending power. When the US government taxes, it withdraws US Dollars from the private sector so, the private sector is left with less US Dollars to spend. Thus, federal taxation controls inflationary pressures should they arise. FICA is a good example. FICA removes a chunk of a worker’s paycheck that the worker could have spent on rent or a mortgage payment, groceries, clothing for the kids or gasoline for the car. Instead, with no inflation present or even threatening, the FICA tax dollars are taken, the amount taken is then recorded in the name of the worker for Social Security purposes, and the FICA tax dollars are destroyed. The record of destroyed FICA tax dollars is a spreadsheet called “The Social Security Trust Fund”. By suspending FICA, workers would be able to keep those dollars and spend them immediately.

Yet another purpose of federal taxation is to modify your behavior. If the majority of citizens decide that smoking is bad and should be discouraged, the US government can tax cigarettes, driving the price high enough to where many people either do not wish to pay the high price, or they simply cannot afford them anymore. The behavior of smokers is then modified. But the one thing federal taxes simply do not do is fund any federal spending, because there are no gold reserves to defend anymore. The gold standard is gone.

The third lie is that the US Treasury issues bonds, because the government has no money of its own and, like a household, it must borrow if it wants to spend more than its income. And again, that’s the gold standard, not modern fiat. Once more, during the gold standard, the US government agreed to convert US Dollars to gold and so, had to defend its gold reserves. If it wanted to spend more than it taxed, or simply put, if the US government wanted to run deficits, it had to issue bonds for that purpose to ensure that the amount of currency in circulation was in keeping with the amount of gold on hand. By issuing bonds, the government could deficit spend without increasing the supply of currency. See how that works? The entire point here is that the US government always issues the US Dollars, gold standard or fiat. But during the gold standard days, because it pegged the US Dollar to something that it couldn’t issue (gold), the US government forced itself to limit the amount of currency that it put into circulation to the amount of gold in its possession. Since the US government can always issue as many US Dollars as it wishes, because its ability to do so is infinite, by ending the gold standard, the US government has a limitless spending capacity. This is not to say that it can spend limitlessly without serious consequences, but rather, that there is no hard financial constraint preventing the US government from increasing the amount of US Dollars in circulation and so, it can buy whatever is for sale priced in US Dollars. So, because there are no gold reserves to defend, like federal taxes, the purpose of treasury bonds completely changes.

Treasury bonds today are issued to assist the Federal Reserve with defending its monetary policy goals. Through open market operations, the Fed will use treasury bonds to conduct activities such as reserve drains. The second purpose of US Treasury bonds today is to provide interest-bearing savings accounts to those looking for a risk-free investment vehicle. The US government offers a bond that pays a bit of interest to entice people to buy them. When people buy a US Treasury bond, the Federal Reserve simply shifts the dollars from a reserve account at the Fed to a securities account also at the Fed where they sit earning interest. And that leads us to the last of the major lies – The US National Debt.

The $20 trillion US National Debt is a bunch of savings accounts held at the Federal Reserve that are earning interest. First, the US government issues some US Dollars into the economy, the US private sector, and also foreign entities who earn US Dollars through international trade, then use those US Dollars they’ve earned to buy treasury bonds and then those dollars are moved to a savings account where they will sit until the Federal Reserve moves them back to a reserve account. In other words, to “pay off” the national debt, it’s as simple as the Federal Reserve moving $20 trillion from these savings accounts back to reserve accounts and then, just as the US government spends for anything else, it adds the interest payments out of thin air by crediting those accounts with US Dollars. No taxes necessary, because federal taxes do not fund federal spending. Reality – what a concept! Now, let’s take an interesting look at the job of the US government as the currency-issuing authority.

The Money Factory – The Job of the Federal Government

The US government operates a “money” factory called the U.S. Bureau of Engraving and Printing. Contrary to popular belief, the U.S. Mint does not manufacture paper currency. All paper cash comes from the Bureau of Engraving and Printing which is part of the U.S. Treasury – not the Federal Reserve, but the U.S. Treasury. The Bureau maintains a website in case you are interested in learning all about US paper currency. Can you guess the URL of the website? The address is ! As I said just a moment ago, the US government operates a “money” factory. Why? Again, because the US Constitution says that it is the only entity that can. The US government is the exclusive issuer of all US Dollars. US Dollars come from nowhere else in the world. Ever wondered why mainstream macro models fail? They do not model US Dollars as the exclusive product of the US government. Oops. Those of you who are thinking about making economics your major will do well to remember this morning’s discussion.

So, how many households do you know that operate a US currency factory? I’ll answer that question for you – None. If they did, yes they wouldn’t need an income to spend, but they could also destroy the economy too. That is why the authority to issue currency falls exclusively upon the US government and because that authority falls on the US government, the US government cannot run out of US Dollars. The United States can run out of goods and services, but the US government cannot run out of US Dollars.

Laws and Regulations

Most importantly, there are some laws regarding US paper currency to prevent private entities from debasing the currency or destroying the economy. The US government takes its constitutional currency-issuing duty seriously and so, counterfeiting is a serious crime that the US government also takes seriously. The Bureau explains what counterfeiting is, who enforces the laws against it and the punishment for counterfeiting:

“Counterfeiting Federal Reserve notes is a federal crime. Visit the United States Secret Service’s website for detailed information.

Manufacturing counterfeit United States currency or altering genuine currency to increase its value is a violation of Title 18, Section 471 of the United States Code and is punishable by a fine of up to $5,000, or 15 years imprisonment, or both.

Possession of counterfeit United States obligations with fraudulent intent is a violation of Title 18, Section 472 of the United States Code and is punishable by a fine of up to $15,000, or 15 years imprisonment, or both.

Anyone who manufactures a counterfeit U.S. coin in any denomination above five cents is subject to the same penalties as all other counterfeiters. Anyone who alters a genuine coin to increase its numismatic value is in violation of Title 18, Section 331 of the United States Code, which is punishable by a fine of up to $2,000, or imprisonment for up to five years, or both.

Forging, altering, or trafficking in United States government checks, bonds, or other obligations is a violation of Title 18, Section 510 of the United States Code and is punishable by a fine of up to $10,000, or 10 years imprisonment, or both.

Printed reproductions, including photographs of paper currency, checks, bonds, postage stamps, revenue stamps, and securities of the United States and foreign governments (except under the conditions previously listed) are violations of Title 18, Section 474 of the United States Code. Violations are punishable by fines of up to $5,000, or 15 years imprisonment, or both.”

In addition to explaining counterfeiting, essentially, what the Bureau of Engraving and Printing is trying to tell all of you who are considering economics as your major, as well as the general public, is that the federal budget is nothing like a household budget, because households do not issue US Dollars. Households must have an income if they wish to spend and can go deep into debt spending beyond their incomes. The US government experiences no such spending constraint nor hardship with regard to debt. When it wants to buy a jet fighter that has trouble flying, it simply enters the bank account of the manufacturer and types the number 1.5 trillion, and suddenly, $1.5 trillion exists. That’s how the US government spends. Now, as a citizen, you might disagree with the US government spending $1.5 trillion for a jet fighter, but you cannot disagree on the grounds that as a taxpayer you have a say in the matter. That makes no sense, since none of the US Dollars that you earned and paid federal taxes with went to pay for the jet fighter. Your federal tax dollars were destroyed. It’s your right and your civic duty as a citizen, not as a “taxpayer”, to agree or disagree with federal spending initiatives. If you want to assert your rights as a “taxpayer”, take your advocacy to your state and local governments where your tax dollars are actually spent. At the federal level, it’s different.

On the federal level, your agreement or disagreement with federal spending initiatives is based upon the fact that you are a citizen that’s entitled to have a say in the type of society you wish to see in the United States. If you wish to see a United States that’s filled with poverty, violence and deprivation, then you will demand that the federal government issue US Dollars exclusively for the needs of the rich and business. If you want to see the US rival the Klingon Empire, then you will demand that the federal government issue US Dollars mainly to build the most powerful military that history has ever witnessed and that technology will allow while ignoring the domestic economic needs of the population. If you wish to see full employment and prosperity, then you will demand that the US government issue US Dollars for a Job Guarantee, a basic income, infrastructure work, universal healthcare, primary and free secondary education, high speed rail, and other public purpose initiatives including the military. In short, when you say, “I don’t want my federal tax dollars going to subsidize corporations”, what you’re saying is, “I don’t want the tooth fairy taking my children’s teeth and giving them to Hobbits.”

Defacement of US Currency

You can’t alter or mutilate paper US Dollars either:

“Defacement of currency is a violation of Title 18, Section 333 of the United States Code. Under this provision, currency defacement is generally defined as follows: Whoever mutilates, cuts, disfigures, perforates, unites or cements together, or does any other thing to any bank bill, draft, note, or other evidence of debt issued by any national banking association, Federal Reserve Bank, or Federal Reserve System, with intent to render such item(s) unfit to be reissued, shall be fined under this title or imprisoned not more than six months, or both.
Visit for additional information.”

Clearly stated in the above paragraph, the Bureau is letting you know that the US Dollar is “evidence of debt”. It is a liability of the US government. Therefore, the US Dollar is a net financial asset to you. We can then easily reason that when the US government deficit spends, it is adding net financial assets to the private sector, which is income for the private sector. Thus, when the US government runs a budget surplus, it is removing net financial assets from the private sector, which is a great way to cause a recession. Bill Clinton ran a budget surplus in 1999 and caused a recession in 2002, and interestingly enough, his wife Hillary Clinton sings the praises of the 1999 surplus to this day. Vote Clinton and cause a recession. Oh, boy! Nothing like yet another neoliberal presidential candidate who will maintain unemployment and poverty.


Now then, about this “$” business. Oftentimes, people will hear me say that the US Dollar is nothing more than a number with a “$” before the number. That’s because it is. You see, when you break down currency into its essential components, there’s the number part that tells us “how many” and then there’s the unit of account (unit of measurement) that tells us what we are talking about. Breaking things down this way helps to clear the minds of people who think that US Dollars are a commodity. They’re simply not. US Dollars are just a bunch of numbers, including zero ($0). Essentially, the “$” sign is a symbol that represents the defined unit of account.


One hundred what? Who knows?


Ah-ha! One hundred dollars. Now, going the other way:


Dollars. Great. Doesn’t really do us any good. How many though?


Ah! Now it’s one million dollars.

The monetary system in the United States operates based on the US government’s US Dollar, symbolized by the “$” sign. So, when the US government wishes to spend, it enters a bank account then simply types a particular number in that bank account and those numbers become “$”. Like the jet fighter that has trouble staying airborne, if the US government is willing to pay $100,000 for a bunch of hammers from ACE Hardware, then it will enter the bank account of ACE Hardware and type the number:


and ACE is paid. End of transaction. In other words, all federal spending really is, is the typing of numbers into existence and the deleting of numbers from existence. The unit of account (US Dollar), symbolized by the “$” sign, is the thing that the US government owns, issues and controls in the United States exclusively. Private entities like households and businesses, and foreign nations, are prohibited from typing US Dollars into existence. They will have to find a way to earn US Dollars.

So, to be clear, if we are talking about the US:

$ = A product of the US government. £ = Not a product of the US government.

The Bureau of Engraving and Printing discusses the possible origins of the “$” symbol:

“The origin of the “$” sign has been variously accounted for, however, the most widely accepted explanation is that the symbol is the result of evolution, independently in different places, of the Mexican or Spanish “P’s” for pesos, or piastres, or pieces of eight. The theory, derived from a study of old manuscripts, is that the “S” gradually came to be written over the “P,” developing a close equivalent of the “$” mark. It was widely used before the adoption of the United States dollar in 1785.”

So, that’s pretty interesting.

What is Paper US Currency?

Now we come to the purpose of the thing that the Bureau of Engraving and Printing is responsible for – Printing paper US currency. What is paper US currency? It is the physical manifestation of a particular number spent into existence by the US government. In other words, it allows you to carry around some special numbers that can buy stuff and people will believe that you have them. What paper currency is not, is a method to fund federal spending. Again, “printing money” to fund federal spending is a gold standard operation. In today’s fiat regime, cash is based on demand for the item. You ask for it, so the US government prints it. The concept is really quite simple to understand.

The US Treasury is the big dog that spends for the US government and collects taxes for the US government. The IRS is a really big accounting agency that ensures federal tax law is complied with and determines the correct amount of tax to be paid to the federal government or the correct amount due in refund to someone. The US Treasury then refunds those who are owed, and removes from the economy that which is paid in tax. The Federal Reserve system is the central bank created by the US government, and is an agency of the US government that manages the nation’s banking system as well as monetary policy. The US Treasury and the Federal Reserve work in cooperation to conduct both fiscal and monetary policy. Together, they comprise the Consolidated Federal Government of the United States. Again, an arm of the US Treasury and not of the Federal Reserve, is the Bureau of Engraving and Printing which manufactures cash so that bank customers can have it.

Before we finish up for today, I’d like to highlight something that the Bureau discusses about paper notes:

“United States Notes (characterized by a red seal and serial number), originally issued in 1862, were the first National currency. Federal Reserve notes were not issued until the creation of the Federal Reserve System in 1913. Both types of notes were redeemable in gold until 1933, when the United States abandoned the gold standard. Since then, both currencies have served essentially the same purpose, and have had the same value. Because United States Notes serve no function that is not already adequately served by Federal Reserve notes, their issuance was discontinued, and none have been placed into circulation since January 21, 1971.”

Note that a Federal Reserve Note is a US Dollar and not some private banking cartel’s “fake money” that it lends to the US government. And no, this isn’t Bureau of Engraving and Printing “PR”. Both United States notes and Federal Reserve notes have been equal in value since the demise of the gold standard, and for redunancy reasons, since the Federal Reserve is the central bank, and since both the gold standard and Bretton-Woods are gone, the US government simply dropped the production one note in favor of the other, instead of producing two different notes. If you happen to have old United States notes, you can give them to the US Treasury and the US Treasury will write you a check for the face value. In other words, if you have a $500 US note, the US Treasury will take it and write you a check for $500.

How US Paper Currency Enters the Economy

Now for the fun stuff to finish off today’s discussion. US paper cash doesn’t enter the economy to fund US government spending. Again, the US government spends when it credits bank accounts with numbers. Paper US currency converts those numbers into physical objects. Bank customers drive the demand for cash. The Federal Reserve determines exactly how much cash is needed and then orders paper cash from the Bureau of Engraving and Printing. The Bureau manufactures it, then ships the cash directly to the twelve federal reserve banks. Good so far? Great.

Usually during the holiday seasons, the demand for cash is higher. So, banks will order cash from the Federal Reserve to ensure that they have enough paper US currency on hand to meet customer demand. Let us assume that Chase needs $5 million in paper US currency. It orders $5 million in cash from the Fed, and the fed deletes the number 5,000,000 from Chase’s reserve account at the Fed, and then ships $5 million in US paper currency to Chase. Chase receives it then stores the $5 million cash in its vaults instead of five million numbers in a reserve account at the Fed. US paper currency is now in the economy.

When a Chase customer goes to Chase and withdraws $20 in cash, first Chase checks the numbers in the customer’s account to ensure that they have enough in their account to withdraw. Then Chase dips into its vault and hands over $20 in paper US currency and at the same time, the numbers in the customer’s bank account drop by 20. The bank customer now walks out carrying around the number 20.

In short, $20 in US paper currency is the US government issued number 20 converted into a physical object that can buy stuff.

After the holiday season, Chase may find that it has more cash on hand than is needed and will ship the cash back to the Federal Reserve. If Chase sends back $2 million in US paper currency, when the Federal Reserve receives it, it will then go into Chase’s reserve account and type the number 2,000,000. And that, as they say, is that.

I would encourage everyone to visit the bureau’s website where you can learn many other interesting things about US paper currency, including denominations and even what to do if you have mutilated, water-damaged or burnt cash. If you happen to be in the vicinity of the bureau, stop by and take a tour of the facility.

Next up in this introductory series is the Federal Reserve – what actually is, why it exists, what is does and most importantly, why it is not a giant private bank.