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UPDATE: (infos from different sources)
Many of the early bill changers took advantage of the fact that U.S. bills are printed with magnetic ink. They could therefore use magnetic heads (like the ones in a cassette tape recorder) to pick up signals from the bills. Areas of the bill (like the background behind the president's face) would generate signals at a specific frequency, and the detection of this frequency would validate the bill. Different bills generate different frequencies, so the frequency can also help determine what the denomination is.Many of the early bill changers took advantage of the fact that U.S. bills are printed with magnetic ink. They could therefore use magnetic heads (like the ones in a cassette tape recorder) to pick up signals from the bills. Areas of the bill (like the background behind the president's face) would generate signals at a specific frequency, and the detection of this frequency would validate the bill. Different bills generate different frequencies, so the frequency can also help determine what the denomination is.
# Genuine dollar bills have a certain conductivity, and checking for the resistance of a bill can authenticate it.
# Inks and papers have different fluorescent properties, and these properties can help tell real from counterfeit bills.
It is a special ink that CANNOT be removed. If no ink shows up it means the bill is a counterfeit.
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You can check this video on metacafe or my channel for other "how to" videos.

































YOU CAN BUY LEATHER PANTS!!
And lets be honest, if it's not a good fake (printed on a bleached bill or starch free paper that closely resembles the true composite of bills), you should be able to tell just from the feel of the paper. Upon a feel fail test, all you've got to do is look for watermarks and microprinting.