The magician folds a dollar bill in half lengthwise and asks a spectator to fold another dollar bill lengthwise and then widthwise, effectively folding it into quarters. The magician takes the lengthwise bill and wraps the quartered bill around it. With a smooth motion, the magician then pulls the lengthwise bill through the fold of the quartered bill, making solid pass through solid.
As an encore, the magician makes the bills pass through each other again, so the long bill is again within the quartered bill.
The crowd goes wild and entire physics textbooks are sent back for revision.
The magician really has four bills -- two pairs of identical bills (right down to the serial number, because spectators will notice the discrepancy subconsciously even if they do not do so consciously). When the spectator is handed a bill to fold, it's really two bills carefully overlaid to look like one. This is easier with brand new bills. The bill that the magician holds is actually a double as well.
When the magician retrieves the quartered double from the spectator, a subtle flick of the fingers separates the bills, and they are held against each other, still folded, as a single bill. The lengthwise-folded double is placed between the two quartered bills (here the magician must take care to insert the bills from the top or the "open" end of the bills because spectators may get suspicious if the bill is inserted through the fold, which is supposed to be solid).
Because the lengthwise bill is between two bills and not inside one, the magician could easily pull it free. However, additional work needs to be done to prepare for the trick's encore. While moving the lengthwise bill through the "fold" of the quartered bill, the magician secretly separates the lengthwise double, using the standard, one-handed, behind-the-palm bill curl to turn the second lengthwise bill into a cylinder that can be hidden within the quartered bills.
To perform the encore, the magician takes the remaining lengthwise bill and pretends to put it behind the quartered bills. In reality, the magician uses the left-hand thumb to curl the bill into a cylinder as it passes behind the quartered bills, and simultaneously unrolls the hidden cylindrical lengthwise bill, giving the appearance of a single bill being moved in a downward direction, but effectively replacing a bill behind the quartered bills with a bill between them, which (because the audience things there's only one quartered bill) appears to be within the fold of another bill.
After a little acting, the magician shows that the lengthwise bill has penetrated the quartered bill..
Cleanup is easy. The knuckle-palmed cylinder is dropped on the ground and kicked out of the way. The rearmost quartered bill is folded repeatedly under cover of the frontmost quartered bill until it is small enough to hide beneath the thumbnail. All that remains visible is a pair of bills, and these can be given out for inspection (but the magician must be sure to get a receipt!)