The first institution with responsibilities of a central bank in the U.S. was the First Bank of the United States, chartered in 1791 by Alexander Hamilton. Its charter was not renewed in 1811. In 1816, the Second Bank of the United States was chartered; its charter was not renewed in 1836, after it became the object of a major attack by president Andrew Jackson. From 1837 to 1862, in the Free Banking Era there was no formal central bank. From 1862 to 1913, a system of national banks was instituted by the 1863 National Banking Act. A series of bank panics, in 1873, 1893, and 1907 provided strong demand for the creation of a centralized banking system. The first printed notes were Series 1914.

Value

The authority of the Federal Reserve Banks to issue notes comes from the Federal Reserve Act of 1913. Legally, they are liabilities of the Federal Reserve Banks and obligations of the United States government. Although not issued by the Treasury Department, Federal Reserve Notes carry the (engraved) signature of the Treasurer of the United States and the United States Secretary of the Treasury.

Federal Reserve Notes are fiat currency, which means that the government is not obligated to give the holder of a note gold, silver, or any specific tangible commodity in exchange for the note. Before 1964, some notes were "backed" by silver and before 1933, by gold: that is, the law provided that holders of Federal Reserve notes could exchange them on demand for a fixed amount of metal (although from 1934–1971, only foreign holders of the notes could exchange the notes for gold on demand). Since 1964, Federal Reserve Notes have not been backed by any single specific asset, but are backed by all assets held in collateral by the Federal Reserve, and by the power of the government to collect assets in taxes. While 12 U.S.C. § 411 states that "Federal Reserve Notes. . . shall be redeemed in lawful money on demand" this means U.S. coins. Thus today the notes are backed only by the "full faith and credit of the U.S. government"—the government's ability to levy taxes to pay its debts. In another sense, because the notes are legal tender, they are "backed" by all the goods and services in the U.S. economy; they have value because the public may exchange them for valued goods and services in the U.S. economy.

Production and distribution

Federal Reserve Notes are printed by the Bureau of Engraving and Printing (BEP), a bureau of the Department of the Treasury.The Federal Reserve Banks pay the BEP not only the cost of printing the notes (about 4¢ a note), but to circulate the note as new currency rather than merely replacing worn notes, they must pledge collateral for the face value, primarily in Federal securities.

The Federal Reserve shreds 7,000 tons of worn out currency each year. Federal Reserve notes, on average, remain in circulation for the following periods of time:

The Federal Reserve does not publish an average life span for the $2 bill. This is likely due to the fact that it is treated as a collector's item by the general public, and therefore is not subjected to normal circulation.

In contrast, the Federal Reserve pays the United States Mint—another Treasury bureau—face value for coins, as coins are direct obligations of the Treasury.

A commercial bank that maintains a reserve account with the Federal Reserve can obtain notes from the Federal Reserve Bank in its district whenever it wishes. The bank must pay for the notes in full, dollar for dollar, by debiting (drawing down) its reserve account. Smaller banks without a reserve account at the Federal Reserve can maintain their reserve accounts at larger "correspondent banks" which themselves maintain reserve accounts with the Federal Reserve.