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The Federal Reserve Note And Its Impact Finance Essay

Federal Reserve Note is one type of currency. Crane & Co. of Dalton, Massachusetts is the company which in charge of production of the banknote paper and United States Bureau of Engraving and Printing helps to print it out. There is only one type of U.S. banknote that is still in production today which is Federal Reserve Note. Before, there are other types of banknote which called Federal Reserve Bank Notes. Both of their functions are the same, however, Federal Reserve Bank Notes should not confused with Federal Reserve Notes although the name is almost the same. Federal Reserve Notes known as fiat currency. They do have take over United States Notes, which were issued by the Treasury Department before.

According to United States Codes, Section 411 of Title 12 states authorization of the Federal Reserve Notes. The notes are issued to the Federal Reserve Banks which directed by the Board of Governors. After that, Federal Reserve Banks will issue the notes into circulation such as issuing the loan or etc. when the notes are circulated, they will become liabilities of the Federal Reserve Banks. All the uses of the notes are obligated by the United States government.

History

The first institution which was First Bank in U.S. set up to centralize the banking system. It was chartered in 1791 by Alexander Hamilton, the first United States Secretary of the Treasury. He was also the Founding Father for capitalism. Actually, he was an economist, and famous political philosopher. However, he has not renewed the license of the bank in 1811. In 1816, there is the established of second bank in the United States. In same condition, its license was not renewed in 1836 too. After that, this issue became the main object which attacked by President Andrew Jackson, the seventh President of the United States. Since 1837 to 1862, there is absence of central bank. Since 1862 to 1913, National Banking Act was established in 1863. After that, bank panics occurred in 1873, 1893 and 1907 urge the banking system to centralize. The first printed notes were Series 1914. In 1928, in order to rescue large amount of dollars, the note size has reduced to the size like today.

Value

Federal Reserve Act of 1913 allows Federal Reserve Banks to issue the bank currencies. Legally, these currencies are considered as Federal Reserve Banks’ liabilities and under obligations of the United States government. Although the Treasury Department is not in charge in issued currencies, it still engraved the currency with the signature of the leader in U.S, such as Treasurer and Secretary.

Based on United States Code, Section 411 of Title 12 clarifies that Federal Reserve Notes can be changed into lawful money once the holders demand it. The redemption can be made in the U.S. These bank notes were “backed” by silver before 1964 and by gold before 1933. This means that the holders of the notes could exchange them when they demand for a fixed amount of metal without against the law. However, from 1934 to 1971, only foreign holders of the Federal Reserve Notes could exchange the notes for gold. These notes stated obviously that they are convertible either to gold or silver “on demand” and they also defined as “demand notes”. Besides, demand notes used to redeem silver were known as silver certificate while demand notes used to redeem gold were referred to gold certificates. Since 1964, Federal Reserve has changed the system. Their bank notes were not been supported by any single specific asset anymore. They are backed by all assets worth with the Federal Reserve’s value such as collection assets in taxes by government. Nowadays, the notes are supported only by the good faith of the U.S. government which means that the government’s ability to access taxes to pay its debts. In another word, the notes which “backed” by GDP in the U.S. economy makes them the legal tender; they have value because they can be used to purchase necessity products in the U.S.

Production and Distribution

Bureau of Engraving and Printing (BEP) is the agency who in charge in produces Federal Reserve Note. It is a government agency given right by the Department of the Treasury in U.S. It helps to designs and printed several of security products which used by the United States Government. Among variety of products, the most important is the banknote printed for the Federal Reserve. The Federal Reserve pays 4 cents per note to the BEP as the printing cost. In order to circulate the new note in the market as new currency by replacing worn notes, the Federal Reserve pay based on the par value in Federal securities.

Federal Reserve’s destroys 7,000 tons of spoilt currency every year. Federal Reserve try to remain the circulation of notes on average for certain period like the following table:

Denomination

$1  

$5  

$10 

$20 

$50 

$100

Months in circulation

21  

16  

18 

24 

55 

89

The Federal Reserve skips an average life span for some notes, for example $2 notes. This is because it is used to as a collect item by the general public. Therefore, $2 bill does not classified into normal circulation.

Contrary, the Federal Reserve also pays to the United States Mint. It is another Treasury bureau by face value for coins, since coins are direct obligated by the Treasury Apartment. The United States Mint’s main job is to produce coin for the United States to perform its trading.

Basically, every commercial bank supposes to have a reserve account with the Federal Reserve. By this, they able to get the notes from reserve account in the Federal Reserve Bank in its area immediately if it needs or requires the notes. So, the bank must pay for the notes by debiting its reserve account. However, some smaller banks do not have a reserve account at the Federal Reserve. They may have their reserve account at a “correspondent banks” which indirect maintain reserve accounts with the Federal Reserve. So, they can obtain the notes from those correspondent banks.

Nicknames

U.S. paper currency can be pronounced by many nicknames and slang terms. The notes are generally called as bills. Besides, American also referred any combination of U.S. notes as bucks. Federal Reserve Notes also referred to “FRNs” or “ferns”. Sometimes, the notes called as Greenbacks since the green ink printed on the back of each note. In 1861, the Demand Notes had been issued. Its back printed with green-inked. The Federal Reserve Note of 1914 has learned to print based on this pattern. Besides, the notes will be pronounced as deceased presidents or “Dead President” since there is always a portrait of former U.S. President printed on it. Then, fin or finif is one of the slang terms for bill, which is five dollar bill; ten dollar bills called sawbuck, the name is based on image of the Roman numeral X; twenty dollar bill called double sawbuck because the image of the Roman numeral XX. In addition, one hundred dollar notes are sometimes referred as “Benjamins” who referred to the portrait of Benjamin Franklin on the note or C-notes since the letter “C” is the Roman Numeral 100. In addition, one thousand dollars can be called as “Large:, “K” which means “kilo”, “Grand” or “Stack” and “G” which means “grand”. Furthermore, ten dollar bills sometimes are being referred to as “Hamiltons” because the Saturday Night Live skit Lazy Sunday was popular during that time. On other hand, in Raymond Chandler’s novel, The Long Goodbye, a five thousand pronounced as “a portrait of Madison” since the James Madison is the president who portrayed on the bill.

Security

Some critics said that it is still an easy matter to forge the U.S. currency although there are some modifications such as adding color and other features to it to prevent counterfeit. Most of the modern color printers are capable to print out the color images of the notes. These kinds of printers are affordable to many consumers. So, Federal Reserve should combined holographic features. For example, the technology used by most other important currencies in the developed country, such as the pound sterling, euro banknotes and Canadian dollar, which are more hard and expensive to counterfeit. Besides, robust technology had been created. This technology used to produce polymer banknotes. This kind of banknotes has been developed for the Australian dollar. Then, it follows and adopted for the New Zealand dollar, Thai baht, Romanian leu, Papua New Guinea kina and other currencies. Polymer banknotes produced to prevent any counterfeiting of notes. The criminal will require high technology and long time to produce polymer banknotes. By this, they can be said to be safer, less crime and can used longer than paper notes.

However, U.S. notes also have some special characteristics which help to prevent it to be duplicated easily. Two of the most special anti-counterfeiting features used by U.S. in printing their currency are different of the paper and the ink. The type of the paper and the formula to mix the ink is confidential. The combination of both paper and the ink create a distinct texture, especially as the currency is circulated. Before the combination, the paper alone does not have any effect on the value of the note until it printed by specific ink. This makes U.S. currency hard to duplicate without the proper machine and materials. Then, Federal Reserve also redesigns the $5, $10, $20, and $50 notes. These few notes have produce by added EURion constellations in it. This provides convenience when using scanning software to differentiate banknote and scanning them. This helps to prohibit any forge of currency.

For the other nation’s banknotes, they are made in different size enable them hard to counterfeit. However, U.S. currency do not have this characteristic, it is prone to forge. Counterfeiters can easily bleach off the ink of the note, normally from a low value note, and then reprint it to become higher-value note. To solve the problem, the U.S government had imprinted vertical laminate strips which contain denominational information in each note. When present the notes under the ultraviolet light fluoresces, different notes will show different color for each denomination which $5 note is blue, $10 note is orange, $20 note is yellow and $100 note is red.

Differentiation

American Council of the Blind criticize that the U.S. bills are hard to differentiate. They are produced with similar designs and printed in the same color before 2003. Besides, they are all same size. By this, the council fought that American Paper currency should designed in different size based on their value. Besides, the currency should be designed with high tangible or touchable features to give convenience to the group who blind since the denominations only can be distinguished by using specific technology. Moreover, printed Braille codes on currency are not a good way to solve this problem because these marking might only useful to someone who knows how to read it. Besides, the Braille symbol easy to be rubbed off and this will confuse the reader. Although some blind persons say that they have ability to track their currency easily by fold different value currency in different places in their wallets. However, they have no choice to rely on sighted peoples or even currency-counting machines to state the value of each bill before they fill the currency into the wallet. This means that blind Americans still might get lie since they must trust sighted peoples or machines. Every time they get back the change for their purchasing or each time they acquire currency from the customers, they unable to make sure it are a correct amount.

By contrast, other major currencies in the world such as the pound sterling and euro, they are made in different size according to each of their value. Larger the size of the currency represent larger the value in it. Beside, they also printed in different colors. These kinds of paper currency not only useful to vision-impaired groups; they are also convenience to the sighted groups since they are easy to observe a high value note among low value notes.

However, the makers of vending machines and change machines argued that the implementation of various size of paper currency may increase the cost and complexity of the machine. Even they keep complaining, the U.S government still considered it since similar arguments were failed to made in Europe when the Europe prior to introduce various size of currency.

At the same time, many other countries’ currency produced with tactile features to assist blind groups which are missing from U.S. currency. Instead of contrasting colors and increasing size of the currency, Canadian currency has a series of raised dots in the upper right corner to differentiate the value. These notes are different with Braille code which printed in U.S. banknotes. Besides, Mexican peso do following the same method by having raised patterns of dashed lines printed in the currency.

Suit By sightless over U.S. currency design

On November 28, 2006, a U.S. District Judge who was James Robertson had claimed that the United States currency gave a heavy burden to the blind groups during the ruled. These currencies even denied their role in the U.S currency system. In Robertson’s ruling, he noted that the U.S currency was only nation out of 180 whom issuing the paper currency which can only differentiate by the size and color. He stated that the raising lettering and tiny perforations must considered by the government to redesign the currency.

In 2002, Judge Robertson agreed with the plaintiff’s argument which claimed that current practice of currency using violates Section 504 of the Rehabilitation Act. By this, the Treasury raised to appeal the decision made by the judge since the judge has directed the Treasury Department to begin redesign the paper currency within 30days.

Based on the plaintiff’s attorney, it was unfair for blind people to rely on or trust the people whom they will never realized whether they have received the right amount of currency. On the other side, the government attorneys had fight back. The attorneys stated that the cost of redesign and reproduce the currency based on the requirements is extremely high.

So, the court had upheld the earlier riling on May 20, 2008. This is because the cost estimates to design and produce new currency were inflated. So, the burdens on blind group or visually impaired currency users had not been solve.

Fiat currency

Federal Reserve Notes had been criticized as a form of fiat currency by a group of critics which include Congressman Ron Paul, libertarians, Austrian Economists and constitutionalist. This is because the currencies are not only backed by the U.S government faith. Furthermore, such critics also argue that Federal Reserve Notes can lose their value easily. They dare to claim this because the U.S. currency’s inflation rate was very high.

Constitutionality

Ron Paul, a U.S. Congressman criticizes about the established of Federal Reserve. He claimed that only the U.S. Congress able to produce money, regulate the money value, foreign coin, and weights or measures the money based on the act. He claims that Federal Reserve Banknotes are not legal tender. This is because they are not issued by Congress. Furthermore, he also said that Federal Reserve has no right to print or create money. However, in fact, the Federal Reserve does not print or coin the money. They are just giving direction to Department of the Treasury in how much to print and the department will print it. However, the real issue which argued by the critics is that an extra-governmental agency has no right to regulate the value of the currency. For example, “bills of credit” which had prohibited from releasing by states are the most similar thing to a fiat money. These Bills of credit issue is found in the destroyable contract between States that made the Federal government’s enumerated powers being proven. Congress nowhere has the right to take back the right and declare only coins and currency for them can be Constitutional money without modify the Constitution.

However, since Congress passed the Federal Reserve Act, so we can say that the Federal Reserve is under obligated by Congress and Congress has power over Federal Reserve. Besides, Congress also able to practice its legislative power to other government departments according to the non-delegation doctrine which interprets by the U.S. Supreme Court.

2.10.2 Sample

Large-size notes

Series

Denominations

Obligation Clause

1914

$5, $10, $20, $50, $100

These notes are receivable by the public. It can be redeemable based on holders’ demand on gold at the U.S. Treasury Department, Washington City, District of Columbia or at any Federal Reserve Bank.

1918

$500, $1000, $5000, $10 000

Small-size notes

Series

Denomination Clause

Obligation Clause

Remarks

1928

$5,$10, $20, $50, $100, $500, $1000, $5000, $10 000

Redeemable in gold on demand at the U.S. Treasury, or in gold or lawful money at any Federal Reserve Bank

Branch ID in numerals

1934

This note is legal tender for all debts, public and private and its redeemable in lawful money at the U.S. Treasury or at any Federal Reserve Bank

Branch ID in letters; during the Great Depression

1950

$5, $10, $20, $50, $100

Slight design changes: branch logo; placement of signature, “Series Year”, and “Washington, D.C”

1963, 1969, 1974

$1, $5, $10, $20, $50, $100

This note is legal tender for all debts, public and private.

First $1 FRN; “Will pay to the bearer on demand” removed; Seal in Latin replaced by seal in English in 1969

1976

$2

First $2 FRN, Bicentennial

Series

Denominations

Obligation Clause

1977, 1981, 1985, 1988

$1, $5, $10, $20, $50, $100

These notes are legal tender for all debts, public and private.

1990

$20, $50, $100

1993

$1, $5, $10, $20, $50, $100

1995

$1, $2, $5, $10, $20

Large-portrait exclude $1 and $2

1996

$20, $50, $100

1999, 2001

$1, $5, $10, $20, $50, $100

2003

$1, $2, $5, $10, $100

2006

$100

Color notes exclude $1 and $2

2004

$10, $20, $50

2006

$1, $5, $10, $20, $50

2009

$1, $20, $100

Image of Series

1928-1995

Small-size notes

Image

Value

Description

Date of

Obverse

Reverse

Obverse

Reverse

First series

Last series

$1

George Washington

Great Seal of the United States

1963

Current (2009)

$2

Thomas Jefferson

Trumbull’s Declaration of Independence

1976

Current (2003A)

$5

Abraham Lincoln

Lincoln Memorial

1928

Current (2006)

$10

Alexander Hamilton

United States department of the Treasury Building

$20

Andrew Jackson

White House

$50

Ulysses S. Grant

United States Capitol

$100

Benjamin Franklin

Independence Hall

Current (2009)

$500

William Mckinley

“Five Hundred Dollars”

Current (1934)

$1000

Grover Cleveland

“One Thousand Dollars”

$5000

James Madison

“Five Thousand Dollars”

$10 000

Salmon P. Chase

“Ten Thousand Dollars”

1995-2003

Small-size notes

Image

Value

Description

Date of

Obverse

Reverse

Obverse

Reverse

First series

Last series

$5

As small-size, small-portrait notes

1999

2006

$10

1999

2003

$20

1996

2001

$50

$100

2009

Post-2004 Redesigned Series

Beginning in 2003, the Federal Reserve introduced a new series of bills. These bills designed with the images of the symbols of freedom. The new $20 bill was first issued on October 9, 2003; the new $50 on September 28, 2004; the new $10 bill on March 2, 2006; the new $5 on March 13, 2008. However, introduction of new $100 had been delayed for few years. At last, it come out on April 21, 2010.

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