Federal Reserve Notes are the currently issued banknotes of the United States dollar. The United States Bureau of Engraving and Printing, within the Department of the Treasury, produces the notes under the authority of the Federal Reserve Act of 1913 and issues them to the Federal Reserve Banks at the discretion of the Board of Governors of the Federal Reserve System. The Reserve Banks then circulate the notes to their member banks,Bryan A. Garner, editor, Black's Law Dictionary 8th ed. (West Group, 2004) . at which point they become liabilities of the Reserve Banks Section 415 describes circulating Federal Reserve Notes as liabilities of the issuing Federal Reserve Bank. and obligations of the United States.
Federal Reserve Notes are legal tender, with the words "this note is legal tender for all debts, public and private" printed on each note. The notes are backed by financial assets that the Federal Reserve Banks pledge as collateral, which are mainly Treasury securities and mortgage agency securitiesSee weekly H.4.1 reports, "Collateral Held against Federal Reserve Notes" that they purchase on the open market by fiat payment.
History Following the enactment of the Constitution, states began chartering commercial banks that issued their own notes. These notes were known as state bank notes. State bank notes did not achieve widespread acceptance outside of their state of issue. The first institution to issue notes with national acceptance in the U.S. was the nationally chartered 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 and its notes also acquired widespread acceptance; its charter was not renewed in 1836, after President Andrew Jackson campaigned heavily for its disestablishment. From 1837 to 1862, in the Free Banking Era, state bank notes were the only circulating paper currency again. From 1862 to 1913, a system of national banks was instituted by the 1863 National Banking Act. Banks authorized under this act were known as National Banks and issued their own National Bank Notes. These did achieve national acceptance but the U.S. still lacked a central bank. It wasn't until the passage of the Federal Reserve Act that the United States finally had an institution that issued nationally accepted bank notes and had the powers of a central bank.
Federal Reserve Notes have been printed from Series 1914 in large-note format, and from Series 1928 in modern-day (small-note) format. The latter dimensions originated from the size of the Philippine peso Silver Certificates issued in 1903 while William Howard Taft served as Philippine governor-general under the United States colonial administration. In view of its highly successful run, President Taft subsequently appointed a committee that reported favorably on the advantages and savings from adopting the dimensions of Philippine notes for use in the United States. Final implementation of today's small-size format, however, only occurred in 1928.
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 United States Treasury, Federal Reserve Notes carry the (engraved) signature of the Treasurer of the United States and the United States Secretary of the Treasury.
At the time of the Federal Reserve's creation, the law provided for notes to be redeemed to the Treasury in gold or "lawful money." The latter category was not explicitly defined, but included United States Notes, National Bank Notes, and certain other notes held by banks to meet reserve requirements, such as clearing certificates. The Emergency Banking Act of 1933 removed the gold obligation and authorized the Treasury to satisfy these redemption demands with current notes of equal face value (effectively making change). Under the Bretton Woods system, although citizens could not legally possess gold (except as rare coins, jewelry, for industrial purposes, etc.), the federal government continued to maintain a stable international gold price. This system ended with the Nixon Shock of 1971. Present-day Federal Reserve Notes are not backed by convertibility to any specific commodity, but only by the collateral assets that Federal Reserve Banks post in order to obtain them.
Production and distribution A commercial bank that maintains a reserve account with the Federal Reserve can obtain notes from the Federal Reserve Bank in its district whenever it wishes. The bank must pay the face value of the notes by debiting (drawing down) its reserve account. Smaller banks without a reserve account at the Federal Reserve can maintain their reserve accounts at larger "correspondent banks" which themselves maintain reserve accounts with the Federal Reserve.
Federal Reserve Notes are printed by the Bureau of Engraving and Printing (BEP), a bureau of the Department of the Treasury. When Federal Reserve Banks require additional notes for circulation, they must post collateral in the form of direct federal obligations, private bank obligations, or assets purchased through open market operations. If the notes are newly printed, they also pay the BEP for the cost of printing (about 4¢ per note). This differs from the issue of coins, which are purchased for their face value.
A Federal Reserve Bank can retire notes that return from circulation, which entitles it to recover collateral that it posted for an earlier issue. Retired notes in good condition are held in the bank's vault for future issues. Notes in poor condition are destroyed and replacements are ordered from the BEP. The Federal Reserve shreds 7,000 tons of worn out currency each year.
As of 2018, Federal Reserve notes remain, on average, in circulation for the following periods of time:
Denomination $1 $2 $5 $10 $20 $50 $100 Years in circulation 6.6 no data 4.7 5.3 7.8 12.2 22.9
The Federal Reserve does not publish an average life span for the $2 bill. This is likely due to its treatment as a collector's item by the general public; it is, therefore, not subjected to normal circulation.
Starting with the Series 1996 $100 note, bills $5 and above have a special letter in addition to the prefix letters which range from A to Q. The first letter is A for Series 1996, B for Series 1999, C for Series 2001, D for Series 2003, F for Series 2003A, H for Series 2006, K for Series 2006A, J for Series 2009, M for Series 2013, N for Series 2017, P for Series 2017A, and Q for series 2021.
The Series 2004 $20, the first note in the second redesign, has kept the element of the special double prefix. The first letter is E for Series 2004, G for Series 2004A, I for Series 2006, J for Series 2009, L for Series 2009A, and M for Series 2013.
Federal Reserve Notes are made of 75% cotton and 25% linen fibers, supplied by Crane Currency of Dalton, Massachusetts specifically for that purpose.
Nicknames U.S. paper currency has had many nicknames and slang terms. The notes themselves are generally referred to as bills (as in "five-dollar bill"). Notes can be referred to by the first or last name of the person on the portrait (George for one dollar, or even more popularly, "Benjamins" for $100 notes).
Greenbacks, any amount in any denomination of Federal Reserve Note (from the green ink used on the back). The Demand Notes issued in 1861 had green-inked backs, and the Federal Reserve Note of 1914 copied this pattern. Buck for a one-dollar bill. Fin is a slang term for a five-dollar bill, from Yiddish "finf" meaning five. Sawbuck is a slang term for a ten-dollar bill, from the image of the Roman numeral X and its resemblance to the carpentry implement. Double sawbuck is slang term for a twenty-dollar bill, from the image of the Roman numeral XX. One hundred dollar bills are sometimes called "Benjamins" (in reference to their portrait of Benjamin Franklin) or C-notes (the letter "C" is the Roman numeral 100). Dead presidents, referring to the portraits that feature on the front of each bill. (This colloquialism is partially incorrect; neither Alexander Hamilton nor Benjamin Franklin, who appear on the ten-dollar and one hundred-dollar bills respectively, ever served as president of the United States.)
Criticisms
Security Despite the relatively late addition of color and other anti-counterfeiting features to U.S. currency, critics hold that it is still a straightforward matter to counterfeit these bills. They point out that the ability to reproduce color images is well within the capabilities of modern color printers, most of which are affordable to many consumers. These critics suggest that the Federal Reserve should incorporate holographic features, as are used in most other major currencies, such as the pound sterling, Canadian dollar and euro banknotes, which are more difficult and expensive to forge. Another robust technology, the polymer banknote, was developed for the Australian dollar and adopted for the New Zealand dollar, Romanian leu, Papua New Guinea kina, Canadian dollar, and other circulating, as well as commemorative, banknotes of a number of other countries. They are said to be more secure, cleaner, and more durable than paper notes, but U.S. banknotes are already designed to be more durable than traditional cotton-based banknotes, seeing as they are 25% linen. One major issue with implementing these or any new counterfeiting countermeasures, however, is that (other than under Executive Order 6102 as well as the demonetization of Trade Dollars in 1876) the United States has never demonetized or required a mandatory exchange of any existing currency. Consequently, would-be counterfeiters can easily circumvent any new security features simply by counterfeiting older designs, although once a new design is launched, the older designs are usually withdrawn from circulation as they cycle through the Federal Reserve Banks.
U.S. currency does, however, bear several anti-counterfeiting features. Two of the most critical anti-counterfeiting features of U.S. currency are the paper and the ink. The ink and paper combine to create a distinct texture, particularly as the currency is circulated. The paper and the ink alone have no effect on the value of the dollar until post print. These characteristics can be hard to duplicate without the proper equipment and materials. Furthermore, recent redesigns of the $5, $10, $20, and $50 notes have added EURion constellation patterns which allows scanning software to recognize banknotes and refuse to scan them.
The differing sizes of other nations' banknotes is a security feature that eliminates one form of counterfeiting to which U.S. currency is prone: Counterfeiters can simply bleach the ink off a low-denomination note, such as a $1 or $5 bill, and reprint it as a higher-value note, such as a $100 bill. To counter this, the U.S. government has included in all $5 and higher denominated notes since the 1990 series a security thread, which is a vertical laminate strip imprinted with denomination information. Under ultraviolet light, the security thread fluoresces a different color for each denomination ($5 note: blue; $10 note: orange; $20 note: green; $50 note: yellow; $100 note: pink). Additionally the newly designed $100 launched in 2013 has a 3D security ribbon which has proven to be highly resistant to counterfeiting, yet easily understood by the public without special tools or lights.
According to the central banks, the number of counterfeited banknotes seized annually is about 10 in one million real bank notes for the Swiss franc, 50 in one million for the Euro, 100 in one million for United States dollar and 300 in one million for pound sterling (old style).Michel Beuret, "Les mystères de la fausse monnaie" Allez savoir !, no. 50, May 2011 .
Differentiation