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Federal Reserve note

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Various Federal Reserve Notes

Federal Reserve notes are legal tender currency notes. They are issued by the Federal Reserve Banks and have replaced United_States_Notes which were once issued by the Treasury Department. The authority of the Federal Reserve Banks to issue notes comes from the Federal Reserve Act of 1913. A commercial bank belonging to the Federal Reserve System can obtain Federal Reserve notes from the Federal Reserve Bank in its district whenever it wishes. It must pay for them in full, dollar for dollar, by drawing down its account with its district Federal Reserve Bank.

Despite no longer being issued by Treasury Department, Federal Reserve notes must be signed by the Treasurer of the United States and the United States Secretary of the Treasury before becoming legal currency.

Federal Reserve Banks obtain the notes from the United States Bureau of Engraving and Printing (BEP). It pays the BEP for the cost of producing the notes, which then become liabilities of the Federal Reserve Banks, and obligations of the United States Government.

Congress has specified that a Federal Reserve Bank must hold collateral equal in value to the Federal Reserve notes that the Bank receives. This collateral is chiefly gold certificates and United States securities. This provides backing for the note issue. The idea was that if the Congress dissolved the Federal Reserve System, the United States would take over the notes (liabilities). This would meet the requirements of Section 411, but the government would also take over the assets, which would be of equal value. Federal Reserve notes represent a first lien on all the assets of the Federal Reserve Banks, and on the collateral specifically held against them.

Federal Reserve notes are not redeemable in gold, silver or any other commodity. This has been the case since 1933. The notes have no value for themselves, but for what they will buy. They have no backing other than the "full faith of the US 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.

See also: United States Notes, United States Dollar

Source: US Treasury Dept. (http://www.ustreas.gov/education/faq/currency/legal-tender#q2)



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