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What is a Federal Reserve Note?

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  • Written By: Dee S.
  • Edited By: Jenn Walker
  • Last Modified Date: 17 November 2016
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A Federal Reserve note is a form of national currency in the United States. It is often called a bill, such as a ten dollar bill, or a buck, such as ten bucks. A Federal Reserve note can be issued from one of 12 Federal Reserve Banks pursuant to the Federal Reserve Act of 1913 and serves as legal tender. Most commercial banks that belong to the Federal Reserve System can ask for Federal Reserve notes at any time. They come in the following denominations: $100 US Dollars (USD), $50 USD, $20 USD, $10 USD, $5 USD, and $1 USD.

The banks of the Federal Reserve receive Federal Reserve notes from the Bureau of Engraving and Printing (BEP). The cost of printing the notes is covered by the Federal Reserve banks. As a result, the notes become the liability of the banks and the financial responsibility of the United States.

The United States Congress has stated that a bank in the Federal Reserve must have collateral that is equally valuable to the Federal Reserve note or notes that it receives. Usually, the collateral is in the form of securities and gold certificates. As a result, it is believed that the collateral gives backing for the issuing of the note. The thought was that if Congress eventually dissolved the entire Federal Reserve System, the United States government could take over the liabilities. In that case, the liabilities would be the Federal Reserve notes.

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A Federal Reserve note is not redeemable in silver, gold, or other commodities. In other words, a Federal Reserve note does not have any value in itself, but only for what it will purchase. Basically, a Federal Reserve note is backed primarily by the goods, services, and other retail items available.

Each time a Federal Reserve Note is redesigned, it incorporates the highest technological features to prevent counterfeiting. For example, a $100 USD Federal Reserve note has several useful security features. Specifically, a 3-dimensional ribbon on the front of the note has images of 100s and bells that seem to dance across the strip as the note is tilted. In addition, the bell on the front of the note changes color when it is tilted. Also, there is a watermark featuring Benjamin Franklin.

Each denomination has its own security features. The ones that are less valuable, of course, have fewer features. Most retail stores and banks across the nation and the globe know what to look for when they receive a Federal Reserve Bank note. Such information reduces the likelihood of counterfeiting and other illegal activity.

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