One day, scholars will look back and wonder at the madness of our era. How could people come to believe that the Fed’s green pieces of paper, and electronic bank records referring to same, are money? It is because the government says so. Carl Menger, founder of the Austrian School, begs to differ.
“Money has not been generated by law. In its origin it is a social, and not a state institution.”
In fact, the dollar is not money. It is merely the Fed’s credit. On what basis does the Fed issue this credit? More precisely, what asset does the Fed finance by the issuance of this liability? The Fed buys Treasury bonds (and mortgages and other junk nowadays). The dollar is, for the most part, a bite-sized piece of the Treasury bond.
By happy coincidence (for the government, ever hungry to spend more), the Treasury bond is payable using dollars. There is a self-referential component. It’s the biggest Ponzi scheme ever perpetrated.
Money is the most marketable commodity. J.P. Morgan explained it succinctly to Congress, when he testified in 1912. “Money is gold, and nothing else.” To quibble slightly, I add silver to the shortlist.
Regarding the current Federal Reserve's passion to print IOUs, one should look at the banking act which immediately preceded the Federal Reserve Act. The Aldrich–Vreeland Emergency Currency Act of 1908 was a move away from strict adherence to the gold standard.
The Aldrich–Vreeland authorized clearing houses (capitalized by private banks) to issue debt-backed notes (currency). However, in large part because there was a 5 percent tax placed on this emergency currency for the first month it was "outstanding" and a 1 percent increase for the following months it was "outstanding," no bank notes were issued.
Such a tax on the newly printed notes was imposed so that note issuance would only occur during "emergencies" (bank runs) and to help ensure the notes were taken out of circulation in short order so as to not stoke inflation.
Considering the fact that the Fed's balance sheet has increased from $1 trillion to $4.5 trillion from 2008 to 2014, things certainly have changed from the days when IOU printing (note issuance) was considered ill advised.
See also America's Money Machine: The Story of the Federal Reserve for more on the Aldrich-Vreeland Act.