Federal Reserve Notes Explained: Why Fiat Currency Is Just an Economic Fantasy

by: Chris Horlacher

There's so much confusion these days over what money is. To many, it's just something they carry around in their pocket, or swipe with plastic on a regular basis. Like a plasma screen television, most people don't care how it works, only that it does work. The problem today is that what people thought was money doesn't seem to be working very well at all. And so, a curious few have decided to ask the one question they were never supposed to ask.

Just what are those pieces of paper anyway?

The answer is, of course, breathtakingly simple. As the famous economist J.K. Galbraith once said, "The process of money creation is so simple, it repels the mind." It all boils down to an accounting trick, the exchange of two debts. One bearing interest and having a maturity date, the other never maturing and never paying interest but being "redeemable" on demand. That's how it started, at least. It has since morphed in to a far uglier and treacherous version of itself.

There's a lot of confusion out there over what a dollar is, where they come from, and just how they're created. This video slices through all the monetary jargon and breaks down what a Federal Reserve Note is. Much of the information covered in the video is straight out of "Modern Money Mechanics", which is a workbook published by the Chicago Fed. I also used statistics from the National Bureau of Economic Research (NBER) and some good old-fashioned accounting expertise. I hope you enjoy, and come to realize just why the dollar (or any other fiat currency) is an economic fantasy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.