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Federal Reserve System

The next important change in the currency system was introduced by the Federal Reserve Act of 1913, which authorized the establishment of 12 regional Federal Reserve banks, with power to issue two types of currency. The first, and most important, was the Federal Reserve note, which is issued under conditions consistent with economic stability and the needs of trade and industry. As member banks require more currency, they can obtain it from the Federal Reserve banks by drawing on their deposits or borrowing or rediscounting commercial paper if their deposit balances with the Federal Reserve banks are insufficient. The second type of Federal Reserve currency, the Federal Reserve Bank note, was originally intended to replace the national bank notes, but never became a permanent part of the currency because the Federal Reserve notes proved adequate. The national bank notes were retired in 1935, but greenbacks are still part of U.S. paper currency.

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An article from Funk & Wagnalls® New Encyclopedia. © 2006 World Almanac Education Group. A WRC Media Company. All rights reserved. Except as otherwise permitted by written agreement, uses of the work inconsistent with U.S. and applicable foreign copyright and related laws are prohibited.