There is no actual lender of last resort in free banking, it implies just another lender subject to the constraints demonstrated in Thin Air Fallacy. However, in state banking this is the central bank, supported by the taxpayer. The state taxes to provide discount loans to member banks and the state treasury. The loans must be at a discount to market rates as otherwise it doesn't constitute a last resort. Banks always have the option to borrow from other banks and potential depositors. Taxation is necessary to support the discount. So if the economic rate of interest is 10%, the state may lend to member banks at 3% and cover the difference with taxes.

The state has many sources of tax revenue, but typically central banks subsidize discounted loan rates with seigniorage. Central banks are known for proclaiming that they do not "print money", but this is exactly what they do. The U.S. Federal Reserve ("Fed") has the power to order new money from the U.S. Treasury's Bureau of Engraving and Printing. The Fed pays the printing cost for "paper" money (actually cloth) and face value for coinage. The Treasury is just the contractor that performs the work. Typically coinage is produced such that it has slightly higher face value than use value, in order to prevent disappearance of the coins. This use value must therefore be reduced when face value declines relative to it, as the result of devaluation of the corresponding fiat.

This implies that the monetary inflation of state fiat is literally the consequence of printing the "paper" money. This process is somewhat obscured. The Fed does not first print the money, stuff it in a vault, and then lend it out. This is unnecessary. The order is reversed in practice. The Fed issues discounted loans, with the presumption of money in its vault.

The settlement process established by the Fed maintains track of how much money is in each member bank's reserve. The bulk of settlements can often be netted, but periodically money must be physically moved.

To further reduce transportation costs, a significant portion of member bank reserves are required to be held in the Fed's own vault. This can be achieved by purchasing Treasury securities (Treasurys) that are offered for sale by the Fed. These are money substitutes considered sufficient to satisfy member bank reserve requirements. Treasurys are debt issued by the U.S. Treasury and generally purchased in bulk on the open market by the Fed. The Fed reduces the yield of Treasuries (i.e. the rate of interest paid by the state) by providing increased demand. It funds these operations in the same essential manner as discounted loans to its member banks. The distinction is merely that these purchases are discounted loans to the state.

The Fed can pretend it has money in its vault and print it only as required for settlement. This creates the illusion of monetary inflation being the result of lending. But it is actually entirely the result of the Fed's ability to purchase money at a discount, thereby funding the loans. When a member bank requires money it can buy it from the Fed using Treasuries. When the Fed's reserve of actual money is insufficient, it simply makes a "withdrawal" from the taxpayer by ordering money from the printer.

The Fed pays the Treasury the following amounts for dollar "bills":

If it had cost 5.5 cents to print a $1 bill in 1915, it would now cost about $1.40 to do so. When the cost of printing a bill reaches its face value, it has transitioned from fiat to commodity money. At that point its seigniorage value is zero. As devaluation continues the denomination must be discontinued. Observation of central banks engaged in hyperinflation is informative, as money reaches printing cost over much shorter periods of time, and coins tend to disappear entirely. Issuance of larger denomination notes allows the money to remain fiat as the commodity money is abandoned. The Zimbabwe Dollar reached 100,000,000,000,000 unit bills before it was abandoned entirely in favor of foreign currencies.

Without this ability to create fiat the Fed would be unable to settle accounts, just as would any bank, if there was insufficient reserve (including that which could be borrowed) to cover withdrawals and defaults. Until the member bank must settle in money, such as in the case of cash withdrawal at ATMs, teller windows or with non-member banks and other institutions, there is no need to move the actual money, or print it.

But without the ability to print it below cost, the Fed would be subject to default just as any other bank.

The total amount of U.S. Dollars in circulation is referred to as "M0". This includes all tangible currency ("vault cash") plus intangible bank balances in Federal Reserve accounts. These two forms are considered interchangeable obligations (money) of the Fed. The intangible obligations are money that is accounted for but not yet printed.

As borrowing by member banks is reduced, such as by the Fed raising its interest rates, the Fed's obligations can be destroyed with the opposite effect of its printing. While the Fed has contracted M0 by almost 20% in the four years since its peak in 2015, this comes at a cost to tax revenue. The Fed masquerades as a non-profit organization, remitting net income from its loans to the U.S. Treasury annually.

The Federal Reserve increased the federal funds rate target seven times since between Dec. 2015 and June 2018. This has implications for the path of the federal deficit and federal debt in two ways:

• Directly through net interest payments
• Indirectly through the yearly remittances from the Fed to the U.S. Treasury Department

The yearly remittances to the Treasury are essentially the leftover Fed revenue after operating expenses. By law, this additional revenue must be turned over to the Treasury.

The revenue sent to the Treasury peaked at $97.7 billion in 2015 and has been steadily falling since. In January, the Fed sent $80.2 billion to the Treasury.

Federal Reserve Bank of St. Louis

This "leftover Fed revenue" is that which is earned, after operating expenses, from loans of money printed by the U.S. Treasury at nominal cost, guaranteed by its monopoly protection in doing so. So the net result is that the Treasury prints new money and then recaptures the money earned as interest on that money printed. As shown above, the Treasury also borrows money at discounted rates indirectly financed by the Fed, through the issuance of Treasury securities. While money is not printed and then deposited directly into the Treasury, the result is the same.

State monopoly money is not created ex nihilo by fraudulent bank accounting. It is literally created from old blue jeans by the state.

The transition to a modern "cashless society" implies that central banks would retain the existing form of accounting for not-yet-printed fiat, and simply perform all settlement internally. This eliminates printing and settlement transportation costs, and ensures full censorability. An instance of Fedcoin, such as the experimental e-Krona, would be required for people to transact with state money electronically. Bitcoin serves the same purpose, but without state control over either issuance (mining) or confirmation. For these reasons Bitcoin cannot be expected to act as the reserve currency (money) for state banking, as it would necessarily follow the same trajectory as the failed gold standard. Bitcoin's value proposition is in the avoidance of state money.