Currency and Coin – Federal Reserve
An important function of the Federal Reserve is ensuring that enough cash is in circulation to meet the public’s demand.

An important function of the Federal Reserve is ensuring that enough cash—that is, currency and coin—is in circulation to meet the public’s demand. When Congress established the Federal Reserve, it recognized that the public’s demand for cash is variable. This demand increases or decreases seasonally and as the level of economic activity changes. For example, in the weeks leading up to a holiday season, depository institu¬tions increase their orders of currency and coin from Reserve Banks to meet their customers’ demand. Following the holiday season, depository institutions ship excess currency and coin back to the Reserve Banks, where it is credited to their accounts.
Each of the twelve Reserve Banks is authorized by the Federal Reserve Act to issue currency, and the Department of Treasury is authorized to issue coin. The Federal Reserve Board places an annual printing order with the bureau and pays the bureau for the cost of printing. The Federal Reserve Board coordinates shipments of currency to the Reserve Banks around the coun¬try. The Reserve Banks, in turn, issue the notes to the public through depository institutions. Federal Reserve notes are obligations of the Reserve Banks. The Reserve Banks secure the currency they issue with legally authorized collateral, most of which is in the form of U.S. Treasury securities held by the Reserve Banks. Coin, unlike currency, is issued by the Treasury, not the Reserve Banks. The Reserve Banks order coin from the Treasury’s Bureau of the Mint and pay the Mint the full face value of coin, rather than the cost to produce it. The Reserve Banks then distrib¬ute coin to the public through depository institutions.
Although the issuance of paper money in this country dates back to 1690, the U.S. government did not issue paper currency with the intent that it circulate as money until 1861, when Congress approved the issuance of demand Treasury notes. All currency issued by the U.S. government since then remains legal tender, including silver certificates, which have a blue seal for the Department of the Treasury; United States notes, which have a red seal; and national bank notes, which have a brown seal. Today, nearly all currency in circulation is in the form of Federal Reserve notes, which were first issued in 1914 and have a green Treasury seal. Currency is rede¬signed periodically to incorporate new anti-counterfeiting features. When currency is redesigned, all previous Federal Reserve notes remain valid.
When currency f lows back to the Reserve Banks, each deposit is counted, verified, and authenticated. Notes that are too worn for recirculation (un¬fit notes) and those that are suspected of being counterfeit are culled out. Suspect notes are forwarded to the United States Secret Service, and unfit notes are destroyed at the Reserve Banks on behalf of the Treasury. Notes that can be recirculated to the public are held in Reserve Bank vaults, along with new notes, until they are needed to meet demand. Coin that is received by Reserve Banks is verified by weight rather than piece-counted, as currency is.
Today, currency and coin are used primarily for small-dollar transactions and thus account for only a small proportion of the total dollar value of all monetary transactions. During 2003, Reserve Banks delivered to deposi¬tory institutions about 36.6 billion notes having a value of $633.4 billion and received from depository institutions about 35.7 billion notes having a value of $596.9 billion. Of the total received by Reserve Banks, 7.4 billion notes, with a face value of $101.3 billion, were deemed to be unfit to continue to circulate and were destroyed. The difference between the amount of currency paid to depository institutions and the amount of cur¬rency received from circulation equals the change in demand for currency resulting from economic activity. In 2003, the increase in demand was $36.5 billion.
Over the past five decades, the value of currency and coin in circulation has risen dramatically—from $31.2 billion in 1955 to $724.2 billion in 2003 (table 7.1).The total number of notes in circulation (24.8 billion at the end of 2003) and the demand for larger denominations ($20, $50, and $100 notes) has also increased (table 7.2). In 1960, these larger denomina¬tions accounted for 64 percent of the total value of currency in circulation; by the end of 2003, they accounted for 95 percent. Because the U.S. dol¬lar is highly regarded throughout the world as a stable and readily nego¬tiable currency, much of the increased demand for larger-denomination notes has arisen outside of the United States. Although the exact value of U.S. currency held outside the country is unknown, Federal Reserve economists estimate that from one-half to two-thirds of all U.S. currency circulates abroad.

http://www.federalreserve.gov/pf/pdf/pf_7.pdf

How Does the Cash Cycle Work?
With such large-scale demand, the cash cycle—and the Federal Reserve’s role in it—continue to be vital to the economy. Although the Fed doesn’t actually print money (that is the job of the Bureau of Engraving and Printing, or BEP), it is responsible for maintaining enough notes in circulation to meet public demand. Each year the Federal Reserve negotiates a print order with the BEP to fulfill the next year’s anticipated demand for cash, replace worn currency, and accommodate the production demands associated with introducing new currency designs. The Federal Reserve Board’s 2011 fiscal year print order was 6.4 billion notes, with a face value of $165.3 billion. The Fed also ensures the integrity and fitness of notes, destroying those that come into the Fed dirty, torn, limp, worn, or defaced.
Since the Fed began operations in 1914, its cash services have provided security and storage, verified deposits from financial institutions, identified suspected counterfeit notes, differentiated fit from unfit notes, and prepared fit and new notes for shipment to banks. For many years, the Federal Reserve Banks provided these services only to their member banks, but the Monetary Control Act of 1980 gave all depository institutions direct access to Fed cash services.
The evolution of cash continues, and the Federal Reserve System must keep pace. It has already implemented operational changes to improve the efficiency and flexibility of cash services. The Fed uses three principal methods to distribute and process currency and coin in the United States—its own network of processing facilities, cash depots in other cities, operated under contract with armored carriers, and coin terminals—and two methods to reduce the unnecessary movement of cash between financial institutions and the Fed (see the five key methods above).

Five Key Methods the Fed Uses to Distribute Cash
1. The 12 Federal Reserve Banks operate 28 cash-processing facilities housed in 11 main offices, 15 branch offices, and two satellite offices.
2. Ten cash depots temporarily store cash supplied by the nearest full-service Fed office. This reduces the costs and transit time to depository institutions located far from a full-service Fed cash operation.
3. The Federal Reserve Banks have contractual obligations with 168 coin terminals that store, process, and distribute new and used coins to depository institutions.
4. The Custodial Inventory program provides an incentive to depository institutions, 92 of which are currently participating, to hold $10 and $20 notes in their vaults to meet customers’ demand. The higher denominations continue to be filtered through Fed Banks to help reduce the circulation of counterfeit currency.
5. The Currency Recirculation policy requires depository institutions to pay a fee for making a deposit of $10s or $20s and ordering the same denomination during the same business week (a practice known as cross-shipping).

The Future of Cash
In a mixed economy of competing payment methods, we believe that cash will continue to be a vital part of both the U.S. and the global economy in the foreseeable future. But cash is no longer the king it once was. Just 50 years ago, cash was used in 80 percent of domestic payments. Now that number is just 50 percent. From the invention of credit cards in 1950, ATM and debit cards in 1970, and ACH in 1974, to the emergence of online commerce and online banking in the 1990s, competition in the payments marketplace has eroded the dominance of cash. Debit transactions since 1990 have soared by 2,700 percent, and ACH by 680 percent, while cash volume has grown by only 4 percent annually. Checks have been the hardest hit: Usage has declined by more than 50 percent.
Cash still has one important advantage—a sense of control and anonymity that many other payment forms cannot offer. One of the major aims of central banking is to sustain people’s confidence in the overall payments and financial system. Cash, by providing a stable, safe form of physical currency, remains an important component of the Fed’s ability to maintain public confidence.
Cash isn’t going away anytime soon. Nor is the Fed’s role in the cash cycle. http://www.clevelandfed.org/forefront/2012/winter/pdf/ff_2012_spring_13.pdf FEDPOINT Currency Processing and Destruction

• Federal Reserve Banks handle billions of dollars in currency each day. In the district served by the Federal Reserve Bank of New York, currency is processed at the East Rutherford Operations Center in New Jersey.
• Each business day, the New York Fed processes more than 19 million notes deposited by depository institutions.
• The New York Fed destroys approximately five million unfit currency notes each business day.
Currency Processing and Destruction
Each business day, Federal Reserve Banks handle currency that is deposited by banks. For safekeeping and space reasons, banks send currency to the Reserve Banks when they have more than enough on hand to satisfy their customers' needs.
Depending on daily and seasonal fluctuations, an individual bank may deposit funds at a Federal Reserve Bank several times a week. The Bureau of Engraving and Printing (BEP) of the U.S. Treasury, in turn, supplies newly printed cash, and the Bureau of the Mint supplies coin, to the Reserve Banks to fill bank orders.
Currency Deposits at the East Rutherford Operations Center
In the district served by the Federal Reserve Bank of New York—the Second District—currency processing is performed at the East Rutherford Operations Center (EROC) in New Jersey. Banks deliver coin and currency by armored carriers to EROC, a state-of-the-art facility that opened in 1992. The facility operates under strict controls.
After receiving clearance from the New York Fed Police, armored carriers deliver currency to EROC's Paying and Receiving Division. The paying and receiving tellers verify the contents upon delivery and issue a receipt to the carrier.
The tellers perform a two-step process. First, they check the integrity of the currency and then enter the content information into an automated tracking system.
The currency is then transported to EROC's automated currency vault, where it is stored and later retrieved for processing.
Processing of Currency
EROC employees in the currency verification department use high-speed currency processing machines to verify the deposits. Deposits are retrieved from the automated vault and sent to currency verification processing rooms, where the currency is fed into the high-speed processing machines. The machines count each note—at an average rate of 74,000 notes per hour—and validate its denomination, test for fitness and automatically bundle fit notes into packages. The fit notes eventually make their way back into circulation when banks order currency from the Fed.
Incorrect denominations, suspected counterfeits, and non-machine-readable notes are rejected, and, if necessary, the depositing bank's account is debited or credited. EROC employees inspect suspected counterfeit notes by hand, paying particular attention to the portrait, scroll work, seals, and colored fibers of each bill, as well as to the weight, color and texture of the paper. Suspected counterfeits are stamped "COUNTERFEIT" at the point of detection, and forwarded to the U.S. Secret Service, the Treasury agency charged with maintaining the integrity of the nation's currency.
Currency Destruction
The authorization to destroy currency was given to the Federal Reserve Banks by the Treasury Department in 1966. At EROC, unfit currency is separated at the high-speed currency processor, where the notes are cut into confetti-like shreds and sent to a disposal area.
All destroyed currency is replaced with new currency ordered by the Federal Reserve from the Bureau of Engraving and Printing. Reserve Banks provide the BEP with an estimate of new currency needs for the coming year based on the past year's usage. Roughly 26 percent of all notes replaced are $1 notes, which have a life expectancy of 21 months. Other denominations remain in circulation longer. A $100 bill, for example, usually lasts seven years.
October 2011

http://www.newyorkfed.org/aboutthefed/fedpoint/fed11.html

MAPS - https://www.newyorkfed.org/registration/busdev/zone/eroc.pdf

FEDPOINT How Currency Gets into Circulation

• There is about $829 billion dollars of U.S. currency in circulation; the majority is held outside the United States.
• The Federal Reserve Banks distribute new currency for the U.S. Treasury Department, which prints it.
• Depository institutions buy currency from Federal Reserve Banks when they need it to meet customer demand, and they deposit cash at the Fed when they have more than they need to meet customer demand.
As of December 2007, currency in circulation—that is, U.S. coins and paper currency in the hands of the public—totaled about $829 billion dollars. The amount of cash in circulation has risen rapidly in recent decades and much of the increase has been caused by demand from abroad. The Federal Reserve estimates that the majority of the cash in circulation today is outside the United States.
Meeting the Variable Demand for Cash
The public typically obtains its cash from banks by withdrawing cash from automated teller machines (ATMs) or by cashing checks. The amount of cash that the public holds varies seasonally, by the day of the month, and even by the day of the week. For example, people demand a large amount of cash for shopping and vacations during the year-end holiday season. Also, people typically withdraw cash at ATMs over the weekend, so there is more cash in circulation on Monday than on Friday.
To meet the demands of their customers, banks get cash from Federal Reserve Banks. Most medium- and large-sized banks maintain reserve accounts at one of the 12 regional Federal Reserve Banks, and they pay for the cash they get from the Fed by having those accounts debited. Some smaller banks maintain their required reserves at larger, "correspondent," banks. The smaller banks get cash through the correspondent banks, which charge a fee for the service. The larger banks get currency from the Fed and pass it on to the smaller banks.
When the public's demand for cash declines—after the holiday season, for example—banks find they have more cash than they need and they deposit the excess at the Fed. Because banks pay the Fed for cash by having their reserve accounts debited, the level of reserves in the nation's banking system drops when the public's demand for cash rises; similarly, the level rises again when the public's demand for cash subsides and banks ship cash back to the Fed. The Fed offsets variations in the public's demand for cash that could introduce volatility into credit markets by implementing open market operations.
The popularization of the ATM in recent years has increased the public's demand for currency and, in turn, the amount of currency that banks order from the Fed. Interestingly, the advent of the ATM has led some banks to request used, fit bills, rather than new bills, because the used bills often work better in the ATMs.
Maintaining a Cash Inventory
Each of the 12 Federal Reserve Banks keeps an inventory of cash on hand to meet the needs of the depository institutions in its District. Extended custodial inventory sites in several continents promote the use of U.S. currency internationally, improve the collection of information on currency flows, and help local banks meet the public's demand for U.S. currency. Additions to that supply come directly from the two divisions of the Treasury Department that produce the cash: the Bureau of Engraving and Printing, which prints currency, and the United States Mint, which makes coins. Most of the inventory consists of deposits by banks that had more cash than they needed to serve their customers and deposited the excess at the Fed to help meet their reserve requirements.
When a Federal Reserve Bank receives a cash deposit from a bank, it checks the individual notes to determine whether they are fit for future circulation. About one-third of the notes that the Fed receives are not fit, and the Fed destroys them. As shown in the table below, the life of a note varies according to its denomination. For example, a $1 bill, which gets the greatest use, remains in circulation an average of 21 months; a $100 bill lasts about 7.4 years. Denomination of Bill Life
Expectancy
(Years)
$1 1.8
$5 1.3
$10 1.5
$20 2
$50 4.6
$100 7.4 The Federal Reserve orders new currency from the Bureau of Engraving and Printing, which produces the appropriate denominations and ships them directly to the Reserve Banks. Each note costs about four cents to produce, though the cost varies slightly by denomination.
Virtually all of currency notes in use are Federal Reserve notes. Each Federal Reserve Bank is required by law to pledge collateral at least equal to the amount of currency it has issued into circulation. The bulk of the collateral pledged is in the form of U.S. Government securities and gold certificates owned by the Federal Reserve Banks.
Making U.S. Currency More Secure
In late 1996, the Treasury began issuing a series of Federal Reserve notes containing new features that make the notes harder to counterfeit. The Treasury introduced the modified notes in order of decreasing denomination—the $100 bill appeared in March 1996, the $50 bill in October 1997, the $20 bill in September 1998, and the $10 and $5 bills in May 2000. The most noticeable modification was a larger, slightly off-center portrait that incorporates more detail, thereby making the bill harder to counterfeit. For the benefit of persons with impaired vision, the back of the modified $50, $20, $10 and $5 bills features numerals larger than those on older currency.
In October 2003, the United States issued a newly redesigned $20 note with enhanced security features and subtle background colors of blue, peach and green. A new $50 note was issued on September 28, 2004. On March 2, 2006, the new $10 note entered circulation. On March 13, 2008, the new $5 note entered circulation. The $100 note is also slated to be redesigned, but a timetable for its introduction is not yet set.
Putting Coins into Circulation
The procedures for putting coins into circulation are similar to those for currency. The U.S. Mint produces coins in Philadelphia, Denver, and San Francisco, and ships them to the Federal Reserve Banks and to authorized armored carriers, which supply banks that need coins to meet the public's demand.
The distribution of coins differs from that of currency in some respects. First, when the Fed receives currency from the Treasury, it pays only for the cost of printing the notes. However, coins are a direct obligation of the Treasury, so the Reserve Banks pay the Treasury the face vFalue of the coins. Second, large banks in some Federal Reserve Districts participate in a Direct Mint Shipment Program, and receive coins directly from the Mint. In the New York area, there also is an arrangement under which banks that need coins buy them from banks that have a surplus. To promote the arrangement, the New York Fed stands ready to match banks that have excess coins with those that need coins.
June 2008

http://www.newyorkfed.org/aboutthefed/fedpoint/fed01.html