What is a Federal Reserve note?

[Libertarian666]

Ok, let's suppose that the phrase "US Dollar" has a meaning.

In that case, what is a Federal Reserve Note? A note is an obligation, that is, the evidence of a contract that obligates some entity to do something.

This is a note where the obligation is that the Federal Reserve will pay 100 Dollars to the bearer on demand:

https://en.wikipedia.org/wiki/Federal_R ... 2150-G.jpg.

The wording of the obligation is "Redeemable in gold on demand at the United States Treasury, or in gold or lawful money at any Federal Reserve Bank".

So if you brought this to the Treasury (before it was defaulted on, of course), they would pay you $100 in gold, e.g., 5 Double Eagles. We can ignore the "lawful money" clause because that applied only to the Federal Reserve Bank. Notice there is also no "legal tender" clause.

Next, here's a 1934 Federal Reserve Note:
https://en.wikipedia.org/wiki/Federal_R ... _Front.jpg

This is a note where the obligation is that the Federal Reserve will pay 10 Dollars to the bearer on demand. It also says that it is legal tender and is redeemable in "lawful money" at the Treasury or any Federal Reserve Bank. Let's ignore the "lawful money" clause for the moment, noting only that this is still an obligation to pay something.

Finally, there is a 1995 "Federal Reserve Note": https://en.wikipedia.org/wiki/Federal_R ... bverse.jpg.

What is the obligation that this note represents, i.e., who is to pay what to whom?

When you can answer this, Grasshopper, you will be enlightened.

[Xan]

I think we all get your point by now.  It just isn't that interesting.  Well, academically maybe, but it's not particularly meaningful or actionable.

[glennds]

I think we all get your point by now.  It just isn't that interesting.  Well, academically maybe, but it's not particularly meaningful or actionable.

+1

[Hal]

Currency / Money from island of Yap

https://en.wikipedia.org/wiki/Rai_stones

[img]http://yap%20stone%20money.jpg[/img]

What is the obligation?
What is the intrinsic value?

Is there really any difference between a piece of rock, a piece of paper or a piece of gold other than the value we "believe" it has.....

Now if anyone can use these concepts to better explain the PP to me. Great!

Hal

[Libertarian666]

If someone who claimed to understand physics couldn't define one of the major terms used in physics, I would doubt that he really understood physics.

The same goes for economics.

But if no one is interested then obviously this thread will peter out soon.

[Pointedstick]

The basic unit of economics is money. A dollar is money. A federal reserve note is money. They are money because they are required for tax payments, highly liquid and divisible, used for buying and selling virtually everywhere in the USA, and represent a basic unit of account. The two are functionally interchangeable in the USA and they constitute a free-floating fiat currency not backed by anything--same as most world currencies today. End of story. It's really not that complicated.

[Libertarian666]

The basic unit of economics is money. A dollar is money. A federal reserve note is money. They are money because they are required for tax payments, highly liquid and divisible, used for buying and selling virtually everywhere in the USA, and represent a basic unit of account. The two are functionally interchangeable in the USA and they constitute a free-floating fiat currency not backed by anything--same as most world currencies today. End of story. It's really not that complicated.

If a dollar is the same thing as a Federal Reserve "note", then neither of them is anything but a piece of paper with writing on it.

Real money isn't very complicated, but fake money is, precisely so that the issuer can take advantage of everyone else. That's what we have.

Now let us return to the regularly scheduled discussion of assets denominated in an undefined unit of account.

[rickb]

A dollar is a unit of debt.  Dollars are not backed by nothing - they're backed by debt.  The US government does not just "print money out of nothing" - they borrow it into existence (although way more money is borrowed into existence by the private sector than by the government).

Read the words on the FRN: "This note is legal tender for all debts, public and private."

Ultimately what a dollar bill is good for is to extinguish $1 worth of somebody's debt.

If everyone in the country and the government paid off all their loans, no one would have any dollars.  They might have real assets, but dollars are not connected to real assets.  They're connected to debt.

[jafs]

They're pieces of paper with pictures and writing on them.

And, they're widely accepted as a medium of exchange for real goods and services that people want/need.

I'm not sure that it's true that they're "just" for debts, although they're clearly good for that.  Why do you think that without debt, they'd disappear?  Do you think we'd go back to a barter system if people weren't indebted?  I would think that all the reasons we moved away from bartering would still exist, and so we'd still want a medium of exchange.

[Pointedstick]

The basic unit of economics is money. A dollar is money. A federal reserve note is money. They are money because they are required for tax payments, highly liquid and divisible, used for buying and selling virtually everywhere in the USA, and represent a basic unit of account. The two are functionally interchangeable in the USA and they constitute a free-floating fiat currency not backed by anything--same as most world currencies today. End of story. It's really not that complicated.

If a dollar is the same thing as a Federal Reserve "note", then neither of them is anything but a piece of paper with writing on it.

Right. That's all they are. Just pieces of paper with some ink and writing on them. They have no intrinsic value and are not backed by any commodity or substance. They are just pieces of paper that you happen to need in some form or other to discharge your tax liabilities.

[Libertarian666]

Federal Reserve Notes are liabilities of the Federal Reserve

http://www.federalreserve.gov/monetaryp ... lities.htm

Federal Reserve liabilities

The major items on the liability side of the Federal Reserve balance sheet are Federal Reserve notes (U.S. paper currency) and the deposits that thousands of depository institutions, the U.S. Treasury, and others hold in accounts at the Federal Reserve Banks. These items, as well as the Federal Reserve's other liabilities, can be seen in tables 1, 5, and 6 of the H.4.1 statistical release.

The expansion of Federal Reserve assets that has resulted from the aggressive response to the current financial crisis has been matched by an expansion of the Federal Reserve's liabilities, particularly the deposits of depository institutions.

Federal Reserve notes, net of Federal Reserve Bank holdings

Historically, Federal Reserve notes have been the largest liability on the Federal Reserve's balance sheet. A U.S. depository institution, when it needs more currency to meet its customers' needs, asks a Reserve Bank to send it more Federal Reserve notes. The Reserve Bank ships the currency to the institution and debits the institution's Federal Reserve account by the amount shipped. Thus, an increase in Federal Reserve notes outside of the Reserve Banks is matched, in the first instance, by a reduction in the quantity of reserve balances that banks and other depository institutions hold in their Federal Reserve accounts. Similarly, a depository institution that finds that it has more Federal Reserve notes on hand than it needs to meet its customers' needs generally returns the extra currency to a Reserve Bank; the Reserve Bank credits the institution's account so the liability side of the Federal Reserve's balance sheet shows a reduction in Federal Reserve notes outstanding and a matching increase in reserve balances held by depository institutions.

If I print "I will pay you 1 oz. of silver on demand" on a piece of paper with my signature (or whatever it takes to create a legal obligation), and hand it to you in exchange for some real good, I have obligated myself to pay you 1 oz. of silver whenever you demand it. Thus, that note is my liability.

If I print "I will pay you one dollar on demand" on a piece of paper with my signature (or whatever it takes to create a legal obligation), and hand it to you in exchange for some real good, I have obligated myself to pay you one dollar (whatever that may be) whenever you demand it. Thus, that note is still my liability.

If I print "One Dollar" on a piece of paper with my signature and hand it to you in exchange for some real good (assuming you would accept it), what have I obligated myself to do? Nothing, so that is neither a Note nor a liability.

If the Bureau of Public Engraving prints "One Dollar" on a piece of paper and the Federal Reserve issues it to you, what is the Federal Reserve obligated to do? Nothing, so that is neither a Note nor a liability.

Hope that helps.

[Hal]

Exactly!

A FRN is a piece of paper with some ink on it.

Now, using your example of a piece of paper with your signature plus the word "Dollar" printed on it. We shall call it a "Techno - dollar".

It's intrinsic value is nothing, it's just a piece of paper.

BUT.....

If the Arabs will only accept "Techno - Dollars" in exchange for oil, then to me it does have value.

If in the future the Arabs will accept "TennPaGa - Dollars" because they like his face and signature on a piece of paper, then sorry, the "Techno - Dollar" just lost a lot of it's value to me.

My understanding it's this concept that led HB to include both Gold and the USD in the PP. The perceived value moves between these two items. The fact that the USD is the reserve currency gives it value, otherwise the Zimbabwe dollar could have been used instead....

[whatchamacallit]

A light went of in my head on how a Federal Reserve note and a Dollar are different from reading some of TennPennPa's link.


A Federal Reserve note is the physical form of a reserve balance that is redeemable for a Dollar.

When a Federal Reserve note goes into the world, the reserve balance of the bank it came from would go down.

I believe that coins are the only physical form of a dollar.

When a coin goes into the world only the dollar balance of the bank account holder would go down.



If you take a Federal Reserve note to a bank, you will get a dollar in your bank account ( a liability ). The bank would be able to deposit Federal Reserve note and increase reserve balance (asset).


Ran out of time trying to think that to words but let me know where I am wrong.

[Libertarian666]

A light went of in my head on how a Federal Reserve note and a Dollar are different from reading some of TennPennPa's link.

A Federal Reserve note is the physical form of a reserve balance that is redeemable for a Dollar.

When a Federal Reserve note goes into the world, the reserve balance of the bank it came from would go down.

I believe that coins are the only physical form of a dollar.

When a coin goes into the world only the dollar balance of the bank account holder would go down.

If you take a Federal Reserve note to a bank, you will get a dollar in your bank account ( a liability ). The bank would be able to deposit Federal Reserve note and increase reserve balance (asset).

Ran out of time trying to think that to words but let me know where I am wrong.

No, a Federal Reserve "note" is not redeemable for a US Dollar coin.

That is because, although a bank will give you something called a "US Dollar coin" in exchange for a "FRN", there are no actual US Dollar coins in circulation in the US today. We have tokens with the words "dollar" on them, which are fashioned in the likeness of coins, but those tokens have roughly the same relationship to actual coins as mud pies do to edible pies.

Here is an example of a US Dollar coin: https://upload.wikimedia.org/wikipedia/ ... dollar.jpg. Needless to say, no bank will give you one of those for a FR"N".

[Pointedstick]

Okay, so I can't take a federal reserve note and through a series of exchanges, wind up with a dollar coin.

So what? I can exchange it for a gold eagle coin (or any other gold coin) in the market just fine if I prefer hard assets to fiat paper.

Of course I think your point is that the fact that it is not backed by gold or silver or something from the issuer makes it worthless or broken or fake money or something like that but I dunno, it seems to work just fine for me. Maybe you're holding it wrong.

[rickb]

A dollar is a unit of debt.  Dollars are not backed by nothing - they're backed by debt.  The US government does not just "print money out of nothing" - they borrow it into existence (although way more money is borrowed into existence by the private sector than by the government).

Read the words on the FRN: "This note is legal tender for all debts, public and private."

Ultimately what a dollar bill is good for is to extinguish $1 worth of somebody's debt.

If everyone in the country and the government paid off all their loans, no one would have any dollars.  They might have real assets, but dollars are not connected to real assets.  They're connected to debt.

They're pieces of paper with pictures and writing on them.

And, they're widely accepted as a medium of exchange for real goods and services that people want/need.

I'm not sure that it's true that they're "just" for debts, although they're clearly good for that.  Why do you think that without debt, they'd disappear?  Do you think we'd go back to a barter system if people weren't indebted?  I would think that all the reasons we moved away from bartering would still exist, and so we'd still want a medium of exchange.

The total US debt at this point is about $18T.  M3 (total amount of liquid and "near" liquid money available in the US - counting all physical cash, all bank account balances, all CDs, all money market funds held by individuals and corporations) is about $17T.  To pay off just the US debt requires all of this, and some more.  Private debt is several times the US debt (dollars are actually only fractionally backed by debt).

So, yes, quite literally without debt there would be no dollars.

I'm not necessarily saying this is a problem - but it is what Techno seems to be harping on.  Every dollar bill in your wallet.  Every dollar in your bank account balance.  All dollars anywhere correspond to somebody's debt.  It's basically a zero sum game.  I can't get rich (in dollars) unless somebody else goes into debt by an equal (alright - fractional) amount.

[jafs]

Well, you mean practically speaking, we'd use up all the dollars to pay off the debts, not that theoretically we wouldn't use currency if we were debt-free, is that it?

I don't get that - when you go to work and get paid, your boss isn't going into debt when he signs your paycheck, necessarily, is he?

[Pointedstick]

Every new dollar corresponds to someone's debt. You're paid with dollars that already exist. But when you take out a mortgage, the bank is creating new dollars out of thin air to give to you to buy your house--dollars that are "backed" with the debt that you now owe the bank. To pay off that debt, you need to pay the bank back the principal + interest, but the money that you use to do this originated somewhere else, when somebody else took on some debt to create the dollars!

[jafs]

If your boss is paying you with already existing dollars, then they're not in debt because they pay you, though, are they?

And, then, if/when you pay the bank back with your income from work, you're not going into debt to do that either.

Also, if the bank then puts the dollars you pay them back into their reserves and don't lend them out again, that's not debt for them.

So, the bank creates "new" dollars, lends them to you, you work and pay back the mortgage, and the bank puts the money back into reserves, and the whole thing at the end is debt-free, isn't it?

If we all were debt-free, wouldn't we still want a medium of exchange?

[Pointedstick]

If your boss is paying you with already existing dollars, then they're not in debt because they pay you, though, are they?

You're thinking too micro. Where did the boss get the money from? Where did it come from originally? What happened at the moment when those dollars/FRNs/whatevers blipped into existence?

And, then, if/when you pay the bank back with your income from work, you're not going into debt to do that either.

Also, if the bank then puts the dollars you pay them back into their reserves and don't lend them out again, that's not debt for them.

Banks don't lend from their reserves. They don't need to. There are banking systems in this world that have zero reserve requirement. That is, banks lend without having a penny in their "vaults." https://en.wikipedia.org/wiki/Reserve_r ... quirements

So, the bank creates "new" dollars, lends them to you, you work and pay back the mortgage, and the bank puts the money back into reserves, and the whole thing at the end is debt-free, isn't it?

Where did the money to pay the interest on the loan come from? Food for thought: http://www.relfe.com/wp/money/want-earth-plus-5/

If we all were debt-free, wouldn't we still want a medium of exchange?

Yes. I'm not saying it's impossible to have money without debt. It definitely is. But in the USA, we have a debt-based monetary system, so the two are linked. It's just the way the system is set up. It doesn't have to be set up this way, but that's the way it is, for a variety of reasons.

In fact, it's not 100% true: there is non-debt-backed money in the USA: coins. When the mint makes some coins, they're not missing any debt to back it. They just create the coins and voila, the money supply has expanded. No reason it all couldn't be done this way.

[MachineGhost]

In fact, it's not 100% true: there is non-debt-backed money in the USA: coins. When the mint makes some coins, they're not missing any debt to back it. They just create the coins and voila, the money supply has expanded. No reason it all couldn't be done this way.

And the reason we do have a debt-based monetary system is so that the money supply is elastic and can naturally respond to inflations and deflations spontaneously without government interfence (boy, it sure doesn't stop them from trying, does it???).