Financial Update (October-December 2000)


Cover Story

Financial Services Strategic Plan

Supervising FHCs

New Lending Data


Did You Know?

Data Bank

The Docket


The Fed Processes and Distributes Cash to Meet the Public’s Needs

If, as the song says, “Money makes the world go around,” then the Federal Reserve System is helping to keep the planet spinning. The U.S. payment system is the largest in the world, and the Fed plays several key roles in this system. In distributing U.S. currency and coin and removing unfit notes from circulation, the Fed ensures that enough cash is in circulation to meet the public’s demand.

The public usually gets its cash from banks, and banks get their cash, either directly or indirectly, from Federal Reserve Banks. Most medium-sized and large banks maintain reserve or clearing accounts at one of the nation’s 12 Federal Reserve Banks. These banks pay for the cash they order from the Fed by having their accounts debited. Smaller banks may have accounts at larger, correspondent banks, and these correspondent banks charge the smaller banks a fee for providing currency.

The amount of cash that the public and banks need tends to correspond with the level of economic activity and with the time of the year. For instance, consumers typically need more cash during holiday seasons. As this additional currency circulates, it eventually makes its way back to depository institutions via merchants and other businesses. Banks return any excess cash to their regional Reserve Bank, where it is credited to their accounts.

The money place

Nearly all U.S. currency now in circulation is in the form of Federal Reserve notes. These notes are designed and printed by the U.S. Treasury Department’s Bureau of Engraving and Printing (BEP) and delivered to Reserve Banks for circulation. Reserve Banks pay the BEP only for the cost of printing the notes — about 4 cents for each note.

Each of the 12 Federal Reserve Banks issues currency under the authority of the Federal Reserve Act. The act requires that all currency be secured by legally authorized collateral, mostly in the form of U.S. Treasury and federal agency securities held by the Reserve Banks. The notes are a first lien on the assets of the issuing Reserve Bank and are obligations of the U.S. government.

Reserve Banks order coins from the Treasury’s Bureau of the Mint, which produces coins in Philadelphia and Denver. Unlike currency, coins are a direct obligation of the Treasury, so Reserve Banks pay the Treasury the face value of the coins and count the coins in their inventories as an asset on their balance sheets. In some Federal Reserve Districts, coins may also be distributed through large commercial banks or other outlets like armored carrier companies, which receive coins directly from the Mint through the Direct Mint Shipment Program.

Each Reserve Bank keeps enough currency and coin on hand to meet the needs of the depository institutions in its district. Some of this inventory is new notes and coins from the BEP and the Mint. The largest part of the inventory, though, consists of deposits from banks, which return any cash in excess of what their customers need.

Cash it in

Banks return their excess cash to Reserve Banks via armored carriers. Once cash arrives at a Reserve Bank, the handling and processing of that cash is carried out under strict control procedures. Each Federal Reserve employee undergoes a thorough background check before being hired. The number of staff members with simultaneous access to cash is limited. Employees must work in teams, and when cash is being counted they are under constant video monitoring.

Cash shipments are first deposited in a room under bank staff and video surveillance. Once the armored carrier personnel have left the room, cash processing staff verify the contents of the delivery and issue a receipt to the carriers. Fed staff first check the shipment to make sure no containers have been tampered with and then scan barcoded identification information about each container into a computer tracking system. This system ensures that each container is associated with the correct depository institution since armored deliveries often include deposits from several institutions.

Once the initial container inspection and check-in procedure are complete, cash shipments from depositing banks or the Treasury are stored in a vault. Cash containers are retrieved from the vault on a first-in, first-out basis. At some Reserve Bank processing centers, this storage and retrieval system uses robotic equipment.

Before being redistributed, currency deposited by banks is sorted on high-speed currency processing machines. These machines count notes at an average rate of 70,000 notes per hour, confirm the notes’ denomination, fitness and authenticity, and bundle fit notes into straps. Fit currency eventually makes it way back into circulation when banks order currency.

The high-speed currency processing machines also reject incorrect denominations, notes that can’t be read by the machine, and suspected counterfeits. The currency processors at some Reserve Banks automatically direct unfit currency to a shredder at one end of the machine. Destroyed notes are replaced by new ones.

The various Reserve Banks use different methods to dispose of the approximately 15 million pounds of unfit currency removed from circulation each year. Some Reserve Banks compress their shredded notes into briquettes, which are then deposited in landfills, some sell shredded currency, and some send the shreds to the private stationery company that makes the cotton paper on which currency is printed to be recycled into stationery products.

Currency processing staff inspect suspected counterfeit notes by hand, stamp suspect notes as counterfeit, and send them to the U.S. Secret Service, the Treasury agency responsible for maintaining the integrity of U.S. currency.

Pocket change

The Fed’s role in coin operations is more limited than its role in currency processing and distribution. The Mint determines annual coin production and monitors Fed coin inventories to help anticipate demand for coins. To help the Mint plan, Reserve Banks also give the Mint projections about coin orders up to three years in advance.

Since coins don’t require sorting for fitness, the Fed’s coin operations consist mainly of storage and distribution. Coin shipments, unlike currency, are generally not piece-verified but are weighed by the bag to determine the value.

The Fed uses more than 100 sites, called coin terminals, in addition to the Federal Reserve offices, to handle about 80 percent of the Fed’s coin volume. These coin terminals, usually operated by armored carrier companies, reduce the amount of transportation required for coin distribution. The companies also wrap the coins, a service that many retailers and depository institutions need.

U.S. Currency and Coin in Circulation
Over the Decades
($ millions)
Amount ($)
Per Capita*
   June 30, 2000 571,121 2,075.63
   Sept. 30, 1995 409,272 1,553.15
   Sept. 30, 1990 278,903 1,105.14
   Sept. 30, 1985 187,337    782.45
   Sept. 30, 1980 129,916    581.48
   June 30, 1975   81,196    380.08
   June 30, 1970   54,351    265.39
   June 30, 1965   39,719    204.14
   June 30, 1960   32,064    177.47
   June 30, 1955   30,229    182.90
   June 30, 1950   27,156    179.03
*Based on Bureau of the Census estimates of population
Source: U.S. Treasury Department, Treasury Bulletin, September 2000, page 55, table 2

Money makes the world go around

As a proportion of all monetary transactions, cash accounts for only a small portion of the total dollar value. Even so, the value of U.S. cash in circulation has risen dramatically over the last several decades (see the table). An estimated two-thirds of U.S. currency circulates abroad. This high international demand for U.S. currency stems mainly from the confidence the citizens of other countries have in the U.S. dollar.