Means of issue of U.S. dollar

New dollars are issued when the Federal Reserve elects to fund the purchase of debt, primarily U.S. Treasury Bonds , by creating new reserves rather than financing the purchase with existing reserves. When the bond issuer spends the money, new dollars enter circulation.

In theory, Federal Reserve Notes are like checks: liabilities drawn on the Federal Reserve Bank. The Fed offsets these liabilities by holding U.S. Treasury Bonds as assets, which are backed by the U.S. Government's ability to levy taxes and repay.

When compared to hard money backed by gold or silver, this debt-based approach has the advantage of making the currency elastic, giving the government a means of expanding or contracting the money supply in response to changing economic conditions. The disadvantage of this approach is inflation. The money supply must be continually expanded in order to finance interest payments on the debt by which it is issued. This devalues the currency, causing inflation.