Take any currency note and have a look at it. You will find wordings similar to this.
“I promise to pay the bearer a sum of….”
So what does this mean? It means that the reserve bank of the country (in other words the Government) promises that the person who possesses the currency note (i.e the bearer) will be eligible to be paid goods worth the amount mentioned on that currency note.
But what will the bank get in return for assuring and making that payment?
To answer this we have to go back a bit in history, to the origin of the currency notes as we see them today.
Of course in US dollars, it would be "This note is a legal tender for all debts…."
The "Will pay to bearer on demand" which was present in US dollars earlier vanished from it in 1934 and was replaced by "This note is a legal tender for all debts…" !!!
A 1918 US dollar note.
In other words, the dollar note is just a legal tender, meaning all US banks will accept it, but other than that, nothing is promised by the US Federal Reserves about its value. In fact Federal Reserve is NOT Federal i.e it is NOT owned by the US federal government , nor does it have any independent reserves. It is just a group of private banks working with the US treasury department.
“I promise to pay the bearer a sum of….”
So what does this mean? It means that the reserve bank of the country (in other words the Government) promises that the person who possesses the currency note (i.e the bearer) will be eligible to be paid goods worth the amount mentioned on that currency note.
But what will the bank get in return for assuring and making that payment?
To answer this we have to go back a bit in history, to the origin of the currency notes as we see them today.Of course in US dollars, it would be "This note is a legal tender for all debts…."
The "Will pay to bearer on demand" which was present in US dollars earlier vanished from it in 1934 and was replaced by "This note is a legal tender for all debts…" !!!
A 1918 US dollar note.
In other words, the dollar note is just a legal tender, meaning all US banks will accept it, but other than that, nothing is promised by the US Federal Reserves about its value. In fact Federal Reserve is NOT Federal i.e it is NOT owned by the US federal government , nor does it have any independent reserves. It is just a group of private banks working with the US treasury department.
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