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Information > Financial Terms > This page Federal Reserve Notes Circulating notes issued by the Federal Reserve banks, as authorized by Section 16 of the Federal Reserve Act. They furnish approximately a major position of the currency in circulation in the U.S. and represent the principal liabilities of the Federal Reserve banks. Any Federal Reserve bank may make application to its Federal Reserve agent (who happens to be also the chairman of its board of directors, one of the three Class C directors all appointed by the Board of Governors of the Federal Reserve System) for such amount of Federal Reserve notes as it may require to meet the demand of member banks for currency. Application is accompanied by tender to the Federal Reserve agent of collateral authorized under the act in an amount equal to the sum of the Federal Reserve notes applied for. An act of congress approved March 18, 1968 (P.L. 90-269) eliminated the provision of Section 16 of the Federal Reserve Act under which the Federal Reserve banks were required to maintain reserves in gold certificates of not less than 25% against Federal Reserve notes. The collateral therefor offered was to consist of the following:
P.L. 90-269 also repealed the provision in Section 16 of the Federal Reserve Act that required each Federal Reserve bank to maintain on deposit in the Treasury of the United States a sum in gold certificates sufficient in the judgment of the secretary of the Treasury for the redemption of the Federal Reserve notes issued to such bank but in no event less than 5% of the total amount of notes issued, less the amount of gold certificates held by the Federal Reserve agent as collateral security; such deposit of gold certificates was counted and included as part of the 25% reserve in gold certificates repealed. However, the Federal Reserve Act as amended continues to require the maintenance of collateral behind net Federal Reserve notes outstanding equal to the face amount of such Federal Reserve notes outstanding. This collateral may be gold certificates credits or special drawing rights credits, U.S. government securities, federal agency securities, or secured discount window borrowings (loans and advances by Federal Reserve banks). As a result of the DEPOSITORY INSTITUTIONS DEREGULATION AND MONETARY CONTROL ACT OF 1980, other collateral became eligible to collateralize Federal Reserve notes, such as foreign government or agency securities acquired by Federal Reserve banks. Each Federal Reserve bank receives a share of the total gold certificates and special drawing rights credits equal to the percentage of total Federal Reserve notes the individual bank has outstanding. If necessary, credits are redistributed to reflect changes in the percentages of notes issued by individual Federal Reserve banks during the previous year. The Federal Reserve agent is the representative of the Board of Governors of the Federal Reserve System at each Federal Reserve bank. Assistant agents also are stationed at the board of governors and represent the agents at each Federal Reserve bank. to release unissued notes from its vault, the Federal Reserve bank is required to pledge collateral at least equal to the amount of notes it wishes to issue. The Washington-based agent issues the currency to the requesting Federal Reserve bank. the Federal Reserve Act (Sec. 4) requires the board of governors to designate one of the three Class C directors (those appointed by the board of governors) of each Federal Reserve bank as chairman of the board of directors of the Federal Reserve bank and as Federal Reserve agent. The Federal Reserve agent shall each day notify the board of governors of all issues and withdrawals of Federal Reserve notes of the Federal Reserve bank to which he is accredited. The board of governors may at any time call upon a Federal Reserve bank for additional security to protect the Federal Reserve notes issued to it. Any Federal Reserve bank may retire any of its Federal Reserve notes by depositing them with the Federal Reserve agent or with the Treasurer of the United States and thus receive back the collateral deposited with the Federal Reserve agent for the security of such notes. Also, any Federal Reserve bank may at any time reduce its liability for outstanding Federal Reserve notes by depositing with the Federal Reserve agent its Federal Reserve notes, gold certificates, or lawful money of the United States. In addition, any Federal Reserve bank may at its discretion substitute other collateral of equal amount with the approval of the Federal Reserve agent. The act of July 19, 1954 (68 Stat. 495) repealed that portion of Section 16 of the Federal Reserve Act which prohibited one Federal Reserve bank from paying out notes issued by any other Federal Reserve bank, under penalty of a 10% tax, upon the face value of the notes so paid out. In addition to being secured by the direct pledge of the collateral, Federal Reserve notes are a direct obligation of the issuing Federal Reserve bank and represent a first lien on all the assets of the bank. They are also a direct obligation of the U.S. government. Like all other forms of currency, Federal Reserve notes are full legal tender for all public and private debts. An act of congress approved June 4, 1963 (P.L. 88-36), in addition to repealing the Silver Purchase Acts and the related tax on transfers of silver bullion, amended Section 16 of the Federal Reserve Act so as to authorize the issuance of $1 and $2 Federal Reserve notes. The purpose of this legislation was to make monetary silver available for coinage by substituting Federal Reserve notes for silver certificates. Before this amendment, the law limited the issuance of Federal Reserve notes to denominations of $5 and up. Accordingly, Federal Reserve notes in the $1 denomination were first issued in November, 1963. The $2 denomination was included so that Federal Reserve notes would be authorized in all denominations of paper money, i.e., $1, $2, $5, $10, $20, $50, $100, $500, $1,000, $5,000, and $10,000. The $2 Federal Reserve note, replacing the $2 denomination of UNITED STATES NOTES which was discontinued in 1966, was introduced on April 13, 1976. The denominations of $500, $1,000, $5,000, and $10,000 were discontinued by action of the Board of governors of the Federal Reserve System on December 27, 1945, and on July 14, 1969, their issuance was finally terminated. Notes bear upon their faces a distinctive letter and serial number which are assigned by the Board of Governors of the Federal Reserve System to each Federal Reserve bank. The original Federal Reserve Act contemplated that Federal Reserve notes would be 100% secured by ELIGIBLE PAPER, which would thus make them truly ideal ELASTIC CURRENCY, expanding and contracting with the supply of such business paper, although the act did permit Federal Reserve banks to reduce their liability for Federal Reserve notes by depositing gold or lawful money with the Federal Reserve agents. This ideal has been gradually relaxed since; in 1916, by authorizing bills bought in the open market as collateral for notes; in 1917, by authorizing gold certificates, and member bank promissory notes as collateral; and beginning in 1932 and made permanent in 1945, by authorizing the use of U.S. government securities as collateral. Nevertheless, the elastic characteristic of Federal Reserve note circulation continues as the volume of circulation fluctuates in line with needs of business and the public for currency. Federal Reserve notes should not be confused with FEDERAL RESERVE BANK NOTES, which have been in the process of retirement.
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