Federal Reserve Note

DEFINITION of 'Federal Reserve Note'

The most accurate term used to describe the paper currency (dollar bills) circulated in the United States. These Federal Reserve Notes are printed by the U.S. Treasury at the instruction of the Federal Reserve member banks, who also act as the clearinghouse for local banks that need to increase or reduce their supply of cash on hand. This term is often confused with Federal Reserve Bank Notes, which were issued and redeemable only by each individual member bank, but phased out in the mid-1930s.

BREAKING DOWN 'Federal Reserve Note'

Prior to 1971, any Federal Reserve Note issued was theoretically backed by an equivalent amount of gold held by the U.S. Treasury. However, under President Nixon, the gold standard was officially abandoned creating a fiat currency. In other words, Federal Reserve Notes were no longer backed by hard assets. Rather, Federal Reserve Notes were now backed solely by the government's declaration that such paper money was legal tender in the United States.

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RELATED FAQS
  1. Who determines the reserve ratio?

    Understand what the Federal Reserve is and what it regulates in the U.S. economy. Learn about the reserve ratio and how the ... Read Answer >>
  2. Why would the Federal Reserve change the reserve ratio?

    Understand the Federal Reserve's monetary policy and the tools it uses to change that monetary policy. Learn about the reserve ... Read Answer >>
  3. What happens if the Federal Reserve lowers the reserve ratio?

    Learn about the Federal Reserve's monetary policy and the tools it uses to control it. Understand what happens if the Federal ... Read Answer >>
  4. What do banks do to control the bank reserve?

    Understand what the Federal Reserve does in order to expand or contract the economy. Learn what depository institutions can ... Read Answer >>
  5. How do central banks acquire currency reserves and how much are they required to ...

    A currency reserve is a currency that is held in large amounts by governments and other institutions as part of their foreign ... Read Answer >>
  6. How do open market operations affect the money supply of an economy?

    Understand how open market operation affect the supply of money in the economy and learn the specific ways the Federal Reserve ... Read Answer >>
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