DEFINITION of Federal Reserve Note
A Federal Reserve Note is a term to describe the paper currency (dollar bills) circulated in the United States. The U.S. Treasury prints the Federal Reserve Notes at the instruction of the Board of Governors and the Federal Reserve member banks. These banks also act as the clearinghouse for local banks that need to increase or reduce their supply of cash on hand. Once new notes are added they become an obligation of the United States.
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. Instead, Federal Reserve Notes are now backed solely by the government's declaration that such paper money was legal tender in the United States.
The lifespan of the different Federal Reserve Notes is dependent on its denomination. In general, the larger the denomination, the longer the lifespan because they are used less and people are more vigilant holding onto them and keeping them well kept. If you lose a $1 note you may not blink, a $100 bill on the other hand, different story. According to the Federal Reserve the average lifespan of each note is as follows:
- $1 5.8 years
- $5 5.5 years
- $10 4.5 years
- $20 7.9 years
- $50 8.5 years
- $100 15.0 years
Colloquially, the term greenback is used for any denomination of a banknote. Some specific nicknames are Benjamin for a $100 bill and Tom for the $2 bill, both in reference to the president depicted on the note.