Federal Reserve Notes

A Federal Reserve Note (FRNs or ferns) is a type of banknote issued by the Federal Reserve System and is the main type of paper currency in the United States. more...

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Federal Reserve Notes are fiat currency, with the words "this note is legal tender for all debts, public and private" printed on each bill. (See generally 31 U.S.C. § 5103). They are issued by the Federal Reserve Banks and have replaced United States Notes, which were once issued by the Treasury Department.

History

The first institution with responsibilities of a central bank in the U.S. was the First Bank of the United States, chartered in 1791 by Alexander Hamilton. Its charter was not renewed in 1811. In 1816, the Second Bank of the United States was chartered; its charter was not renewed in 1836, after it became the object of a major attack by president Andrew Jackson. From 1837 to 1862, in the Free Banking Era there was no formal central bank. From 1862 to 1913, a system of national banks was instituted by the 1863 National Banking Act. A series of bank panics, in 1873, 1893, and 1907 provided strong demand for the creation of a centralized banking system.

Federal Reserve Notes were originally paper receipts for money (gold and silver), but over the years the Federal Reserve has disconnected the paper from the money.

Value

The authority of the Federal Reserve Banks to issue notes comes from the Federal Reserve Act of 1913. Legally, they are liabilities of the Federal Reserve Banks and obligations of the United States Government. Although not issued by the Treasury Department, Federal Reserve Notes carry the (engraved) signature of the Treasurer of the United States and the United States Secretary of the Treasury.

Federal Reserve Notes are fiat currency, which means that they are not redeemable in gold, silver or any other form of lawful money (even though U.S.C. 12,411 states "Federal Reserve Notes...shall be redeemed in lawful money on demand"). This has been the case since 1968. The notes have no value for themselves, but for what they will buy. They have no backing other than the "full faith and credit of the U.S. government" (i.e., the government's ability to levy taxes to pay its debts). In another sense, because they are legal tender, Federal Reserve Notes are "backed" by all the goods and services in the economy.

How a federal reserve note enters the money system

Federal Reserve Notes are printed by the Bureau of Engraving and Printing (BEP), a bureau of the United States Mint within the Department of the Treasury. Like coins minted by the United States Mint, they are provided to the Federal Reserve at nominal cost.

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