What Is a Federal Reserve Note?
A Federal Reserve note is a term to describe the paper demand liabilities of the Federal Reserve, commonly referred to as "dollar bills," which circulate in the U.S. as legal tender. For practical purposes, the Federal Reserve note is the monetary unit of the U.S. economy.
The U.S. Treasury prints the Federal Reserve notes at the instruction of the Board of Governors and the twelve 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 Federal Reserve notes are issued, they become a liability of the Federal Reserve, which can be redeemed by bearers on demand for different Federal Reserve notes.
The term Federal Reserve note is often confused with the U.S. dollar, the official unit of account of the U.S.
- Federal Reserve notes are the paper currency circulating in the United States.
- The U.S. Treasury prints the Federal Reserve notes, which are backed by the U.S. government.
- The notes' lifespans differ according to their denomination, with larger notes having longer lifespans.
- Each note is equipped with security features to prevent counterfeiting and identifiers to provide information about the note.
Understanding Federal Reserve Notes
Federal Reserve notes were first issued after the creation of the Federal Reserve System (FRS) in 1913. Before 1971, any Federal Reserve note issued was theoretically backed by a legally specified amount of gold held by the U.S. Treasury, though since 1933 private citizens were not allowed to actually redeem them for gold dollars. Because these notes held legal tender status and represented actual dollars (legally specified as a given quantity of gold held by the Treasury), they came to commonly be referred to as "dollar bills" as they circulated through the economy.
However, under President Nixon, the last vestige of the gold standard was officially abandoned, creating a fully fiat currency, where the Federal Reserve notes themselves became the sole circulating legal tender (along with small base-metal coins), redeemable only for other Federal Reserve notes and not for physical dollars.
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.
Today, Federal Reserve notes circulate as money throughout the U.S. and the rest of the world wherever dollar-denominated transactions take place. These notes are still commonly referred to as "dollars," which was previously a legally defined quantity of gold or silver but is now simply the official unit of account for U.S. legal tender, including Federal Reserve notes.
Useful Life of Federal Reserve Notes
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 in holding onto them and keeping them well-kept. If you lose a $1 note, you may not blink; on the other hand, losing a $100 bill is a different story.
According to the Federal Reserve, the average lifespan of each note is as follows:
- $1: 6.6 years
- $5: 4.7 years
- $10: 5.3 years
- $20: 7.8 years
- $50: 12.2 years
- $100: 22.9 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 referencing the Founding Father depicted on the note.
During the early 1800s, federal and state-chartered banks issued $3 notes.
Federal Reserve Note Requirements
The U.S. Treasury has employed sophisticated tactics to ensure authenticity and prevent the counterfeiting of Federal Reserve notes. The U.S. Treasury enhanced circulating notes with three types of security features: covert features, banknote equipment manufacturer features, and public features. Some public features include various watermarks, security threads, and color-shifting ink.
Federal Reserve notes also have specific identifiers that provide information about them. Each note has an eleven-digit serial number, consisting of letters and numbers (10 digits for $1 and $2 notes).
The first digit identifies the series year, which is the year that the Secretary of Treasury approved a new design or the year that a new secretary's signature was used in the design. Serial numbers that end with a capital letter denote that there was a significant change in the note's design. Stars appearing at the end of the serial number, replacing the last digit, signify that it is a replacement note.
For $5, $10, $20, $50, and $100 denomination notes, there is a two or three-digit code (letter-number format) that corresponds to the Federal Reserve Bank that accounts for that note. The first digit in this code corresponds to the second digit in the serial number. For smaller denominations, such as the $1 and $2 bill, a seal identifies the Federal Reserve Bank.