Federal Reserve Note Definition, Lifespan, Features

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 term Federal Reserve note is often confused with the U.S. dollar, the official unit of account of the U.S.

Understanding Federal Reserve Notes

Federal Reserve notes were first issued after the creation of the Federal Reserve System (FRS) in 1913. Before 1971, each Federal Reserve note issued was backed by a legally specified amount of gold held by the U.S. Treasury, however, private citizens were not allowed to redeem notes for gold dollars. Because these notes held legal tender status and represented actual dollars, they were commonly referred to as "dollar bills" as they circulated through the economy.

However, under President Nixon, the gold standard was officially abandoned, creating a full fiat currency, where the Federal Reserve notes themselves are the sole circulating legal tender, along with small base-metal coins.

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.

The U.S. Treasury prints the Federal Reserve notes at the instruction of the Board of Governors and the 12 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.

Lifespan of Federal Reserve Notes

The lifespan of the different Federal Reserve notes is dependent on their denomination. In general, the larger the denomination, the longer the lifespan because they are not widely circulated.

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

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 reference the Founding Fathers depicted on the note.

Currency in Circulation

In 2021, more than $2.10 trillion of U.S. currency was in circulation, with $2.05 as federal reserve notes and $50 billion as coins. The $100 bill has the largest quantity of notes in circulation, followed by the $1 and $20 bills.

Federal Reserve Note Features

The U.S. Treasury employs sophisticated tactics to ensure authenticity and prevent the counterfeiting of Federal Reserve notes. Three types of security safeguards include covert features, banknote equipment manufacturer features, and public features, such as watermarks, security threads, and color-shifting ink.

Each note includes an 11-digit serial number, consisting of letters and numbers. The first digit identifies the series year when 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 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 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 bills, a seal identifies the Federal Reserve Bank.