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federal reserve Ban k o f Dallas DALLAS, TEXAS 75222 C ir c u la r No. 83-39 M arch 14, 1983 BOOKLET FE D E R A L RESERVE CASH ON TH E MOVE TO ALL D EPO SITO R Y INSTITUTIONS IN TH E ELEVENTH FE D E R A L RESERVE DISTRICT: E n c lo se d is a copy o f a new b o o k le t, " F e d e r a l R e s e rv e C ash on th e M ove," w hich w as p u b lish e d by th e F e d e r a l R e s e rv e B ank o f N ew Y ork. T his b o o k le t p ro v id e s a b r ie f re v ie w o f th e h is to ry o f U.S. p a p e r c u rre n c y an d coin, F e d e r a l R e s e rv e c a sh p ro c e d u re s , an d th e ro le o f th e F e d e r a l R e s e rv e an d th e T re a s u ry in pro v id in g th e n a tio n w ith c oin an d p a p e r c u rre n c y . A d d itio n a l c o p ie s o f th e b o o k le t or th is c ir c u la r will be fu rn ish e d upon r e q u e s t to th e P u b lic A f f a ir s D e p a r tm e n t, E x te n sio n 6289. S in c e re ly y ours, W illiam H. W allace F ir s t Vice P r e s id e n t E n c lo su re B a n k s a n d o t h e r s a re e n c o u r a g e d to u s e th e fo llo w in g in c o m in g W A T S n u m b e r s in c o n ta c tin g th is Ban k: 1-800-442-7140 (in tr a s t a te ) a n d 1-800-527 -920 0 (in te r s ta te ). Fo r c a lls p la c e d lo cally, p l e a s e u s e 651 plus th e e x te n s io n referred to ab ove. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) F ed era l Reserve Cash on T able of Contents I. F o re w o rd ................................... ..............................................................................................Page 1 II. U.S. Cash Constantly C h a n g in g .......................................................................................... Page 2 (a) U.S. Cash Begins In 1652 (b) F irst U.S. Coins Struck In 1793 (c) National Currency Issued In 1861 (d) U.S. Manufactured Notes In 1862 (e) Silver Certificates Issued III. Quality Of U.S. Currency Im p ro v in g ............................................................................. Page 7 (a) Evolution Of Processing Equipment (b) Growing Volume Of Currency (c) Counterfeiting Increases IV. It Takes Money To Make Money.......................................................................................... Page 15 (a) Issuing Paper Currency (b) Distributing Coin V. Ordering Currency Is A Matter Of F o rm ......................................................................... Page 21 (a) Alternative Ordering Methods i VI. All Cash Shouldn’t Be D eposited..................................................................................... Page 24 (a) Special Handling (b) Questionable Currency (c) Coin Deposits and Shipments VII. Cash Transportation Is Priced ......................................................................................... Page 28 (a) Equality Of Charges (b) Coin W rapping Charges VIII. Petty C a s h .......... ................................................................................................................. Page 30 ii Foreword D u rin g the last few years the constituency of the F e d e ra l Reserve has expanded manyfold. In 1978 the International B anking A ct m ade branches and agencies of foreign banks subject to m any F ed eral Reserve regulations, and in 1980 the M onetary Control A ct brought about a new relationship betw een th e U nited States central b anking system and non-m em ber com m ercial banks, m utual savings banks, savings and loan associations and cred it unions. P a r t of the M CA req u ired the F ederal Reserve to m ake services directly available to these institutions. This booklet was p rep a re d p rim a rily to provide our new potential custom ers, m em ber com m ercial banks and the general public w ith a brie f review of the history of U.S. paper currency and coin, F ederal Reserve procedures, efforts by the central bank to im prove one of its m ost im p o rta n t products—cash—and the relationship and role of the F ed eral Reserve and T reasu ry in en su rin g the nation’s businesses and general public have access to coin and paper currency. Special appreciation is extended to the m any F ed eral Reserve System employes who helped p rep a re th is booklet, including A rth u r W. Sam ansky and V alentina Sodano of the F ed eral Reserve B ank of New York who researched, designed and wrote “F ed eral Reserve Cash on the Move,” and Jason S tern and his staff a t the New York Fed, and R obert W etz and his staff a t the P hiladelphia Reserve Bank, who jointly oversaw production and printing. Whitney R. Irwin Vice President, Cash Processing Function Federal Reserve Bank of N ew York March 1982 1 U. S. Cash Constantly Changing In 1959 the Lincoln M em orial replaced the w heat design on the backs of pennies. In 1964 the “Kennedy” half-dollar replaced the “F ra n k lin ” half-dollar. In 1971 the silverless “E isenhow er” dollar, with the reverse side showing the Apollo spacecraft landing on the moon, was introduced. A nother change was m ade in the coin in the bicentennial series, firs t stru ck in 1975, to include the Liberty Bell and the moon on the reverse side. In the sam e year, the half-dollar w as changed to show Independence Hall on the reverse, and the back of the q u a rte r w as changed to picture a colonial dru m m er. Two years late r the original design of the eagle w as retu rn ed to the q u a rte r, and the presidential seal was re tu rn e d to the half-dollar. In 1976 the $2 note w as re-introduced. In 1979 the small-size “Anthony” dollar w as m inted. U. S. Cash Begins In 1652 These changes in p a p e r currency and coin are all p a rt of the evolution of the nation’s currency, a process which began in 1652 when the M assachusetts Bay Colony becam e the firs t B ritish colony to m ake its own. T h a t colony also contributed to the foundation of m odern-day currency, when, in 1690, it issued to soldiers retu rn in g from the unsuccessful siege of Quebec, “bills of c re d it” or “prom issory notes.” 2 Those p a p e r notes w ere in fact, the first paper money in A m erica, as well as the far-flung B ritish E m pire. Eighty-five years later, the fo reru n n er of a national currency w as introduced, when the Continental Congress authorized an issue of p ap er money. But rapid depreciation b ro u g h t about an idiom for w orthlessness—“not w orth a continental.” First U.S. Coins Struck In 1793 In 1792, the young U.S. governm ent established a m in t in Philadelphia and the following y ear stru c k the firs t official currency of the U .S.—copper cents and halfcents about the size of m odern-day q u a rte rs and nickels. In 1794 silver half-dim es, half dollars and dollars were added to circulation, followed a year late r by gold $10 “eagles” and “half-eagles.” In 1796 the coinage of the nation w as expanded to include q u a rte rs and dimes. A nother building block of today’s cu rren cy w as added when the Congress of 1861 approved the issuance of “D em and T reasu ry Notes,” technically, the firs t official p aper currency accepted throughout the nation. However, betw een 1812 and the Civil W ar, the U.S. governm ent issued a sm all q u an tity of “T reasu ry N otes” to finance operations. But, these notes w eren’t intended to circulate as money, although a sm all am ount did. In the 65 years betw een the addition of q u a rte rs and dimes, and the introduction of D em and T reasury Notes, p a p e r cu rre n c y w as issued by private federally c h artered and state-chartered banks. B ut the state ban k cu rren cy often w asn’t acceptable a t its face value outside the im m ediate a re a of the issuing bank. 3 It is perhaps an anom aly of U.S. currency th a t nearly 72 years elapsed before Congress, in May 1933, enacted legislation m ak in g all U.S. coins and p ap er currency legal ten d er for all debts “public and p riv a te.” National Currency Issued In 1861 As noted, the firs t U.S. paper currency dates to 1861—$60 million with “green backs.” But, betw een 1861 and 1865 the nation w as torn by Civil W ar. Thus, in May 1861, the Confederacy issued $20 m illion of non-interest b earin g Confederate T reasury notes, payable in specie after two years. A second issue was approved by the Confederate Congress in 1861 to be redeem able six m onths a fte r a peace treaty. By 1864, a total $730 million w as issued. N e a r the end of the w ar, 60 Confederate dollars w ere w orth one U.S. gold dollar. In 1861 in terest-bearing three-year T reasury Notes also w ere issued by the U.S. governm ent, which although not intended to be “money,” w ere circulated by the public. The following year, $150 million in U.S. Notes w ere issued, the firs t incorporating silk fibers and the firs t w ith engraved signatures of T reasu ry officials. E a rlie r notes c a rrie d h a n d w ritten signatures of T re asu ry employes. U.S. Manufactured Notes in 1862 In the sam e year, the T reasury secretary was authorized to m anufacture notes a t the T reasu ry D epartm ent, through the B ureau of E n g ra v in g and P rinting. In time, B E P has assum ed responsibility to design and produce all U.S. currency. Some earlier issues were printed by private companies. The y ear 1862 also b ro u g h t suspension of coin paym ents, leading to hoarding by the public. To overcome the shortage, businesses issued tokens, tickets and other 4 substitutes. The year also saw the use of postage stam ps which were authorized for use as money, a fte r the fact. P rin te d “Postage Notes” were firs t released through the U.S. A rm y p aym aster in A ugust 1862. In all, about $20 million w as issued. In 1863 fractional notes w ere authorized, as w ere “N ational B ank Notes,” the la tte r the fo reru n n er of m odern-day F ed eral Reserve Notes. Two other events affecting U.S. money took place in 1863: one- and two-year interest-bearing notes w ere issued and circulated; and Congress authorized the use of gold certificates as currency, although the firs t issue d id n ’t occur until 1865. By Ju ly 1870 still another “c u rre n c y ” had been issued: N ational Gold Bank Notes. Associations w ere established by federal law to issue gold certificates up to 80 percent of the p a r value of U.S. governm ent bonds req u ired to be deposited w ith the U.S. T reasury. Only a few banks issued the notes. Two years late r Congress authorized “C urrency C ertificates of Deposit” for use by national banks as a m eans of facilitating the b a nking business. Silver Certificates Issued The “Silver C ertificate” then m ade its w ay onto the cu rren cy scene, with the first series 1878. The C ertificates were in denom inations of $1 through $1,000, varying over the years as large and sm all sizes. By 1890 “T re asu ry ” or “Coin Notes,” in denom inations of $1 to $1,000 (although the $500 denom ination was never issued), becam e redeem able in silver or gold coin. 5 The Gold Reserve A ct of 1934 stopped redem ption of currency for gold and in 1967 Congress authorized the T reasury to cease redem ption in silver beginning in 1968. The last two e n tra n ts were F e d e ra l Reserve B ank Notes, authorized in the F ederal Reserve A ct in 1913 and first issued as series 1915, to give the new central bank the sam e note circulation privilege as national banks, b u t w ithout the capital stock restrictions; and “F ed eral Reserve Notes,” first issued in Novem ber 1914. In 1929 all p ap er money in use was redesigned and reduced in size. P rior to July 1929, most currency w as 7.42 inches by 3.125 inches, com pared to m odern F ederal Reserve Notes, which m easure 6.14 inches by 2.61 inches, a re about .0043 inches thick and weigh .03 troy ounces. By Ju ly 1929, six kinds of notes were being distributed: U.S. Notes in denom inations of $1, $2 and $5; silver certificates in denom inations of $1, $5 and $10; F ed eral Reserve B ank Notes in denom inations of $5, $10, $20, $50 and $100; National B ank Notes in denom inations of $5, $10, $20, $50 and $100; Federal Reserve Notes in denom inations of $5 to $10,000; and Gold Certificates in denom inations of $10 to $100,000, the latter used only by F ederal Reserve Banks and the U.S. Treasury. F ederal Reserve Notes cu rren tly m ake up v irtually all currency in circulation in the nation. 6 Quality Of U.S. Currency Improving The quality of p a p e r currency in circulation in the U nited States is im proving as a result of technological changes and initiatives instituted by the F ed eral Reserve. And, because of increased use of com puterized currency processing equipm ent, Reserve B anks m ay be able to fu rth e r im prove cu rren cy quality w ithout increased cost. System efforts to develop high-speed currency processing equipm ent were b ro ught about by a decline in the fitness of currency in circulation and grow ing volume of currency. By mid-1981, m ore th an 65 high-speed cu rren cy counting and sorting m achines were operational in the System, w ith about 110 expected to be in place by the second q u a rte r of 1983. As p a r t of this p ro g ra m Reserve Banks have developed fitness sta n d a rd s based upon lig h t reflected from notes m oving through special scanners in the high-speed processing equipm ent. The d irtie r the note, the less light is reflected. The scale of zero, an extrem ely d irty note, to 30, rep resen tin g a new note, is expected to be used to m easure 100 percent of all notes processed in 1984, excluding those specially processed by depository institutions before deposit a t Reserve Banks or branches. M any Reserve B anks and branches cu rren tly use the fitness scale. 7 Thus, since each note passing through the high-speed processor is electronically scrutinized, few er m arg in al and unfit notes will be recirculated than u n d e r processing m ethods used previously. In addition, few er fit notes a re p rem atu rely removed from circulation and destroyed as occurs u n d e r sem i-autom ated procedures. Thus, Reserve Banks will be able to control the grow th in the size of th eir new note orders, and the B ureau of E n g ra v in g and P rin tin g m ay be able to slow the grow th of the n um ber of notes produced. This reduction m ay resu lt in significant savings. The Currency Destruction Process U ntil the introduction of high-speed cash processing equipm ent, which autom atically shreds p ap er currency into l/8 th inch strips, Reserve Banks used different methods to destroy currency. A bout 12 Reserve Banks and branches used furnaces, often with tem p e ra tu re s of 1,800 degrees fahrenheit, to b u rn the paper, reducing it to a whitish ash sim ilar to powder. Some sliced it lengthwise, others chopped it into a confetti-like product, or m ashed it into a gooey pulp. A lthough some of these m ethods a re still used to varying degrees, autom atic shredding eventually will be the p rim a ry m ethod of destruction. Evolution Of Processing Equipment The job of m ain tain in g an adequate supply of fit currency has been an im portant objective of the F ed eral Reserve System, which has worked continually w ith private 8 industry to develop equipm ent geared specifically to achieve central bank quality specifications. Alm ost from the beginning of the System, Reserve Banks used m achines to help process currency. The early m ethod essentially w as a m anual operation, in which an operator visually inspected each note for genuineness and fitness, while a m achine kept count. Because the procedure req u ired note-by-note handling, a typical operator could process only 30,000 to 35,000 notes a day. By mid-1981, only 15 percent of currency was sorted on the low-speed equipm ent. In the mid-1970s, Reserve B anks began supplem enting the existing equipm ent w ith counting m achines which provided for m ore rap id verification, b u t not for m ore rapid determ ination of individual note fitness. U sing th a t equipm ent, fitness is determ ined on a package-by-package basis, called “strap-sorting.” Generally, there are 100 notes to a package. But, because some packages contain both fit and unfit notes, if the package in general is considered unfit, the entire package is destroyed. By mid1981, about 52 percent of the currency deposited a t Reserve Banks was processed on the m edium -speed equipm ent. U sing the strap-sorting m ethod, a typical operator could process 80,000 to 100,000 notes a day, b u t the fitness determ ination w as considered a critical problem. Thus, in the 1970s, the Reserve Banks devoted considerable attention and resources to developing high-speed equipm ent which would provide increased speed in counting, a n d 'sh arp ly im prove fitness determ ination. 9 The result is the c u rre n t “first-generation” com puterized equipm ent, which exam ines each note separately for genuineness and fitness, yet is able to process 50,000 notes an hour.By mid-1981, about 33 percent of the currency counted by Reserve Banks w as processed on high-speed equipm ent. More sophisticated equipm ent is being developed and is expected to be available by the mid-1980s. Growing Volume Of Currency Sorting, exam ining and counting the p ap er currency of the nation also has become m ore difficult every year, p rim a rily because of the grow ing volume. Annually, the Reserve Banks and branches count, a t least in dollar term s, volume equal to virtually the entire circu latin g p aper currency of the nation. F or exam ple, a t yearend 1980, total F e d e ra l Reserve Notes and U nited States Notes, the la tte r issued by the T reasury, and p ap er currency no longer issued but circulating, am ounted to about $125 billion. Meanwhile, in 1980, the Reserve System received and counted m ore th an $104 billion. However, since serial num bers a re n ’t logged, a portion of the notes exam ined and counted m ay have moved through the F ed eral Reserve m ore th an once a year, while others never w ere received by the Reserve Banks. Some notes, for exam ple, are sorted, exam ined and counted by large banks and recirculated to th eir branches and correspondents, or rem ain outside the b an k in g system. 10 There’s Money In Oil Wells, Literally T here is money in oil wells—literally. T h a t is only one of the uses of unfit paper curren cy destroyed by Reserve Banks. In 1980 m ore th an 3 billion pieces of p ap er currency, w ith a face value of about $20 billion and w eighing about 3,000 tons, were destroyed by the 12 Reserve Banks and th eir 25 branches. Since the mid-1960s about $123 billion in p ap er currency has been destroyed. A portion of th a t destroyed currency is sold by some Reserve Banks to private industry un d er s tric t T reasu ry rules. Som etimes the destroyed currency is sold to contractors for use in oil well “m ud.” The m ud is used to fill the space previously occupied by rock and d ir t in the well. In other cases, the currency is sold to companies which b u rn it for use in generators. Still others have used it in roofing m ate ria ls and cardboard. Two uses to which the end product can’t be p u t a re p rin tin g p aper of any kind and containers holding foods or liquids consumed by people. The first exclusion is to g u a rd ag ain st counterfeiting. The p a p e r used by the B E P is produced according to a classified form ula by C rane P a p e r Co., Dalton, Mass. The la tte r prohibition is to avoid potential injury to hum ans, since the ink contains toxic m aterials. The ink is m anufactured by B E P. 11 The c u rre n t volume of p aper currency counted by Reserve Banks is up sharply from the $66 billion processed in 1975, the nearly $46 billion processed in 1970, and the $36 billion handled in 1965. The grow th of currency in circulation is a resu lt of an ex panding economy, as well as bouts of inflation, am ong other factors. The dollar volume of p ap er currency and coin m ore th a n doubled to $7.8 billion a t Ju n e 30, 1940 from $3.1 billion a t Ju n e 30, 1910. D u rin g W orld W ar II, currency and coin rose m ore th an th re e tim es, totaling nearly $27 billion a t Ju n e 30, 1945. Twentyfive years later, total currency in circulation had doubled again to m ore th an $54 billion a t Ju n e 30,1970. By the end of 1980, it had m ore th an doubled again to m ore th an $137 billion. However, along w ith the grow th of the dollar volume has come an increase in the use of h igher denom ination notes. A t yearend 1980, about $49 billion $100 F ederal Reserve Notes w ere in circulation, com pared w ith $21.2 billion in mid-1975, $11.2 billion in mid-1970 and $7.6 billion in mid-1965. Counterfeiting Increases T here also has been an increase in circulation of counterfeit bills. The bulk of bogus notes is stopped by the U.S. Secret Service before circulation. The Secret Service, an a rm of the T reasu ry D epartm ent, is charged w ith protecting the currency of the nation. 12 The S ecret Service found and seized before circulation $16.3 million of counterfeits in 1970, while an estim ated $2.2 m illion w ere passed to th e public by counterfeiters; $45 million of bogus notes w ere seized in 1975, while about $3.6 million w ere passed; and $55.3 million of phony notes w ere cau g h t in fiscal 1980, while $5.5 million w ere passed. Known counterfeits also a re sent to the Secret Service by depository institutions and m erchants. Still others a re unknow ingly included in cash deposits m ade by depository institutions a t the F e d e ra l Reserve B anks and branches. The bogus notes a re sent to the Secret Service by the F ederal Reserve, indicating the date of deposit a t the central bank and the b ranch or office of the institution which m ade the deposit. The identification of the institution is obtained from paper stra p s used to w rap currency shipped to the F e d e ra l Reserve. The account of the depository institution is charged when a bogus note is detected. The Reserve Banks use a variety of procedures to detect counterfeit notes, from the hum an eye to highly sensitive scanners in the high-speed processing equipm ent. 13 How To Tell A Genuine Note From A Counterfeit PORTRAIT SEAL SERIAL NUMBERS Genuine Genuine Genuine S tan d s out sh a rp ly from back g ro u n d . Eyes ap p e a r lifelike. Background is a fine screen of regular, unbroken lines. Saw-tooth points around rim are even and sharp. Figures are firmly and evenly printed, and well spaced. On Federal Reserve Notes, prefix letter always agrees with District letter in seal. Counterfeit May merge with background. Eyes, may be dull or smudgy. Background may be dark, with some irre g u la r and broken lines. Face may seem unnaturally white. Counterfeit Saw-tooth points may be uneven, blunt, or broken. SCROLL WORK Genuine Fine crisscrossing lines are sharp and unbroken. Counterfeit Lines may be blurred and are often broken. 14 Counterfeit May be out of line, poorly spaced, printed too light or too dark. Prefix letter may not agree with District letter in seal. It Takes Money To Make Money The adage “it takes money to m ake m oney” probably has never been m ore true. A ccording to the B ureau of E n g ra v in g and P rin tin g of the U nited States T reasury, the cost of m aking p a p e r currency, regardless of denom ination, doubled from fiscal year 1970 to fiscal year 1980, reflecting increased labor and m aterial costs. In fiscal 1980 B E P spent $18.70 to m an u factu re 1,000 F ed eral Reserve Notes, com pared to $8.02 per 1,000 notes in fiscal 1970. Most of the effort in fiscal 1980 w ent to $l-notes, w ith 1,939,840,000 pieces produced. Second place w ent to $20-notes, of which 634,880,000 w ere made; while th ird place was given to $10-notes, of which 495,360,800 w ere m anufactured. Five-dollar notes were fourth (427,520.000); $100-notes fifth (100,480,000); and $50-notes sixth (56,960,000). In fiscal 1980 no $2-dollar notes w ere m ade. In the previous year 28,800,000 w ere produced. These denom inations a re the only notes cu rren tly produced. Over the years several other denom inations have been discontinued, while still others, such as the $2-note, have been re-introduced from tim e to tim e as currency of the T re asu ry or the F ed eral Reserve. In D ecem ber 1945, p rin tin g of F e d e ra l Reserve Notes in denom inations of $500, $1,000, $5,000 and $10,000 w as discontinued, and since 1969 these notes have been 15 retire d and destroyed as they a re received by Reserve Banks. A t yearend 1980 about $356 million of these notes w ere still in the hands of the public. Only one la rg e r note, the $100,000 gold certificate, was m ade in the U.S. But, it w as never in circulation, lim ited to use betw een Reserve Banks and the T reasury. Only a small n u m b er were made. C ertain fractional denom inations ran g in g from th ree cents to 50 cents also were discontinued years ago. Issuing Paper Currency “N ew ” money, as well as fit currency, moves into circulation th rough currency orders sent to F ederal Reserve Banks by depository institutions. The Constitution of the U.S. specifies Congress has the responsibility to coin and regulate the value of money. When the F ed eral Reserve A ct was signed in 1913, the central bank was, in effect, given a role in th a t process and assigned responsibility to provide for an elastic currency, pay currency in response to public dem and, and absorb unnecessary cash. The F ederal Reserve also has been assigned responsibility for m onetary policy—actions to influence the cost and availability of money and credit. The A ppropriations A ct of 1920 fu rth e r m andated Reserve Banks m ake an equitable and im p artial distribution of available supplies of coin and p ap er currency to banks. Im plicit in these roles is the central b a n k ’s responsibility to d istrib u te new and fit supplies of currency and replace u n fit currency. 16 Depository institutions feel the public’s dem and for cash first. Thus, to m eet the needs of the public, they tu rn to th eir regional Reserve B ank for currency when their own vaults don’t have enough, when they don’t have the denom inations being requested, or when other sources, such as correspondent institutions, c a n ’t m eet needs. Depository institutions have accounts a t the local Reserve B ank sim ilar to accounts the public has a t a depository institution. C urrency ordered by a depository institution from the Reserve B ank is tran sp o rted by arm ored car or registered mail. The depository institution’s account is charged for the am ount ordered. C ertain other charges also a re to be applied in line w ith the req u irem e n t of the M onetary Control Act of 1980 for Reserve B anks to charge institutions for certain services a t explicit prices. Much of the cash a t a Reserve B ank is deposited by depository institutions if they find they have m ore th an enough cu rren cy to satisfy the needs of th eir custom ers. W hen they send excess currency to the Reserve Bank, the depository institution’s account is credited. A variety of special m easures are taken when currency sent to institutions hasn’t previously been in circulation, since the new notes are claim s upon the assets of the issuing Reserve B ank and liabilities of the U.S. governm ent. A m ong various procedures, each Reserve B ank by law m ust tra n sfe r to its F ed eral Reserve A gent—a representative of the Board of Governors of the System a t each Reserve B ank—collateral equal to a t least 100 percent of the value of the currency being issued. 17 The bulk of th a t collateral is in the form of U.S. governm ent securities owned by the F ed eral Reserve System. The rem a in d e r is com prised of gold certificates, special d ra w in g rig h ts or other “eligible” paper, such as bills of exchange or prom issory notes. As a result of the MCA, foreign-denom inated governm ent securities acquired by the F ed eral Reserve through foreign exchange operations, also becam e eligible as collateral. In addition to the in ternal F ed eral Reserve collateral procedure, U.S. currency is “backed” by the full faith and c re d it in the U.S. governm ent. E ach spring, on the basis of recom m endations of th e F ederal Reserve Banks, p rin tin g orders are placed w ith the C om ptroller of the Currency, a p a rt of the U.S. T reasury. The C om ptroller passes requests to the B E P which produces the a ppropriate denom inations w ith the seal of the ord erin g Reserve Bank. The uncirculated Reserve Notes a re shipped u n d e r g u a rd to the ord erin g Reserve Bank, w here they are held by the cash area. Distributing Coin Coin also is relatively expensive to produce. F o r exam ple, in fiscal 1980, pennies cost the T re asu ry ’s B ureau of the M int $7.85 p er 1,000 to produce; nickels $19.16; dim es $9.55; q u a rte rs $21.71; half-dollars $40.41; and A nthony dollars $30.95. In fiscal 1980,11.7 billion pennies w ere m inted, 929 million nickels w ere struck, 1.4 billion dim es w ere m ade, 1.1 billion q u a rte rs w ere tu rn e d out, and 86 million half dollars w ere m ade. In addition 199 million non-silver dollar coins w ere produced. 18 By the end of 1980, m ore than $1.4 billion of non-silver dollar coins and nearly $11 billion of all other coins w ere in the hands of the public. As w ith pa p e r currency, Reserve B anks count a sizable portion of coin every year. In 1980 about 17.7 billion coins valued a t $2.7 billion w ere verified, com pared to 15.4 billion coins or $2 billion in 1975,13.4 billion pieces or $1.5 billion in 1970, and about 6 billion pieces or nearly $500 million in 1965. Only a sm all am ount of coin is rem oved from circulation, p rim a rily “slugs”. In some Reserve D istricts, the m etal is sold to reprocessors. The institution m istakenly depositing the slugs, is credited w ith the proceeds, or charged if the proceeds a re n ’t equal to the value owed. In other Reserve D istricts, slugs are confiscated and the depositing depository institution is charged. F oreig n coin also is rem oved and sold to coin dealers in some Reserve D istricts. The depositing institution is given credit or charged. As w ith paper currency, various coins have been discontinued, such as the halfcent, two-cent, three-cent, 20-cent, and “half-dim e”. The procedures to p u t coin into circulation a re sim ilar to th a t of p a p e r currency. The supply of coin is governed p rim a rily by dem and, as well as facilities available to m int coin. C urrently, coins are m ade in W est Point, Philadelphia, D enver and San Francisco, un d er the control of the D irector of the Mint. Like p ap er currency, coin is shipped to the Reserve Banks and thro u g h them to depository institutions and on to the public. B ut unlike p ap er currency, Reserve Banks buy coin a t face value from the T reasury. The difference betw een the face value of coin 19 and the cost of production is called seigniorage, which is deposited by the B ureau of the M int in the general fund of the T reasury. In essence, Reserve Banks m ain tain inventories of coin a t levels which p erm it them to fill orders from depository institutions to m eet business dem ands. Inventory levels are based upon historical dem and pattern s, w ith additional provision for norm al grow th in dem and. F ed eral Reserve Banks arra n g e , in advance, for shipm ents of new coin from the U.S. M int for the com ing year, in am ounts and on a tim e schedule to m aintain inventories a t required levels. U n d e r this arra n g e m e n t, the M int can schedule its production of coin efficiently and, a t the sam e tim e, Reserve Banks can provide coin as req u ired to m eet business dem ands. L arge users of coin m ay be able to a rra n g e direct shipm ents from the U.S. M int by contacting th eir local Reserve Banks. F ed eral Reserve Banks are req u ired to adhere to the advance shipping schedules. E x cep t in em ergencies, th ere isn’t any provision for obtaining additional coin. In addition to obtaining coin from Reserve Banks, depository institutions often secure larg e am ounts of coin from certain custom ers, such as tra n s it authorities, vending companies and telephone companies, or from correspondent institutions. W hen o rd erin g p a tte rn s or custom er relationships change substantially and suddenly, the Reserve Bank distribution system can become m ore complex and tightness or shortages of certain coins m ay occur. 20 Ordering Currency Is A Matter Of Form In 1980, F e d e ra l Reserve Banks and branches filled orders from depository institutions for about $124.55 billion of p a p e r currency and $3.5 billion of coin. Generally, orders a re filled by providing fit and new currency to m ake the m ost efficient use of existing supplies of currency in the denom inations requested. However, when requests for specific denom inations exceed am ounts available or lim its prescribed by the local Reserve B ank or branch, different denom inations th an those ordered m ay be substituted by the central bank to m eet requested dollar amounts. Moreover, because of the high cost of h andling and tra n sp o rtin g currency, depository institutions in the sam e geographic a re a a re encouraged by some Reserve B anks to exchange fit currency am ong them selves w herever possible. If necessary, the cash officer of the Reserve Bank or b ran c h will assist the depository institutions in m ak in g exchange arran gem ents. To expedite the shipm ent of currency from the central bank, depository institutions should review th e a p p ro p riate o p eratin g c irc u la r or letter, and use the procedures or form s supplied by the head office or the local Reserve b ranch serving the institution’s territo ry . Questions re g a rd in g the o p erating c irc u la r or the form s should be directed to the cash a re a of the Reserve B ank or branch, or discussed w ith the bank services representative of the Reserve B ank or branch. 21 In addition, depository institutions should ensure th e form s a re properly and completely filled out and sent to the Reserve B ank or b ran ch so th a t the form s arriv e several days before the requested delivery date. The tim in g of shipm ent requests—including rules for ord erin g by telephone and through com puter te rm in a ls—a re specified in the operatin g c irc u la r of the local Reserve B ank or branch. Alternative Ordering Methods As an a ltern ate m ethod of ord erin g currency, offices of depository institutions which experience little fluctuation in currency needs, can be supplied with p redeterm ined am ounts of currency and denom inations a t designated tim es by su b m ittin g a “sta n d a rd currency o rd er authorization” form , which can be canceled from time-to-time, as specified in the o p eratin g circu lar of those Reserve Banks and branches offering the service. These changes m ay be necessary for a variety of reasons, including seasonal factors. The public dem and for cu rren cy varies by the day of the week, the week of the m onth and the season of the year. F o r exam ple, d u rin g the w in ter holiday season, people p refe r to hold m ore p ap er currency as they shop for gifts. Periods around the other holidays from L abor Day to Independence Day produce a sim ilar high dem and for pocket cash, although fa r less th an near the w in ter holiday. U rg e n t requests for currency m ay be m ade by telephone. To ensure bogus requests a re n ’t m ade, and to confirm orders a re accurately filled, telephone requests a t m any Reserve Banks and branches a re recorded. As a f u rth e r precaution, personnel 22 ord erin g currency m ust use the ap p ro p riate test w ord from the list of special codes provided by the local Reserve B ank or branch. As p a rt of the security procedures, too, depository institutions should exam ine each bag of currency received to ensure the b a g doesn’t have holes or tears, or signs of tam pering. N otation of these conditions should be m ade on the receipt. If the bag appears to be torn, or shows signs of tam pering, the contents should be verified im m ediately. All currency shipm ents received by depository institutions should be verified w ithin three business days. Generally, institutions should inform the local Reserve B ank or branch by telephone of any differences in excess of $50. If differences a re less th an $50, the central bank should be advised by letter. A t some Reserve Banks and branches, rules req u ire currency shipm ents displaying signs of tam pering, or containing torn bags, be returned. A variety of other procedures, specified in the operating circu lar or letter, should be followed carefully. 23 All Cash Shouldn’t Be Deposited Depository institutions shouldn’t deposit w ith the local F ederal Reserve Bank or b ranch fit currency, unless it is in denom inations which a re n ’t generally used a t th a t bank, or it constitutes significant excess. The costs of handling and tran sp o rtin g c urrency a re high. However, when a depository institution, provided w ith arm ored c a rrie r service by the local Reserve B ank or branch, chooses to deposit excess or unfit currency, it should seek to coordinate the shipm ents w ith the re g u la r arm ored c a rrie r schedule. C urrency shipped to the local F ed eral Reserve B ank or b ranch by any other m eans shouldn’t indicate the contents of the box or bag. In addition, the app ro p riate form s and tags, indicating the nam e and address of the sending bank, should be included in the shipm ent. F u rth e r, shipm ents shouldn’t contain m ore than the m axim um am ount of currency specified in the operating circu lar or letter of the local Reserve B ank or branch. Special attention should be given to the prep aratio n of the currency being deposited, regardless of the shipm ent method. Specifically, fit and u nfit paper currency generally should be w rapped and m ark ed as “fit” or “u n fit” and should be piece-counted and a rra n g e d face and top up in packages as specified by rules of the local Reserve B ank or branch. U n d er no circum stances should denom inations be m ixed in the same package, nor should fit and u n fit currency be packaged or bundled together. 24 Likewise, bundles of p ap er currency, generally 10 packages, should never contain m ixed denominations, and should consist of the n u m b er of packages specified in the o perating circu lar or letter of the local Reserve B ank or branch. P a p e r currency which can’t be a rra n g e d in packages or bundles of the specified n u m b er of notes shouldn’t be sent to the central bank, b u t held until the correct am ount can be accum ulated. F u rth e r, each package of p aper currency should be bound with a single paper strap, which should comply with the A m erican B ankers Association’s color standards. Inform ation concerning color-codes can be obtained from cash officers a t the local Reserve B ank or branch. E ach stra p also should contain the nam e or initials of the person who p rep ared the package, the nam e of the depositing bank, the nam e and address of the office at which the package was prepared, and the date the stra p was prepared. In addition, each bundle should be secured with a heavy duty ru b b e r band, or m achine tied. U nder no circum stances should bundles or packages be secured with pins, clips, small ru b b e r bands, or strap s of another bank. A variety of other procedures are specified in the operating circu lar or letter of the local Reserve Bank facility. Special Handling F u rth e r, certain cu rrency requires special handling. C urrency no longer issued, such as gold certificates, “F ed eral Reserve B ank” Notes (currently issued notes are “F ed eral Reserve” Notes), N ational B ank Notes and 25 large-size notes should be segregated from other currency and should be placed in packages as specified by the local Reserve B ank or branch. Notes which are torn, patched or perforated, should be m ended, if possible, w ith tra n s p a re n t tape on the back—never on the face—to preserve the design or size of the bill. Pins, clips or other m etallic m aterials shouldn’t be used since they m ay cause injury to currency handlers or dam age m achinery. Questionable Currency F ra g m e n ts of notes, which are clearly less than half the original size, or currency in such poor condition th a t its value is questionable, should be sent directly to the U. S. T reasury, B ureau of G overnm ent F inancial Operations, Room 132, A nnex N um ber One, “D C S-B EPA ,” W ashington, D.C. 20226. Rules re g a rd in g reim bursem ent for the frag m en ts a re specified by the T reasury. Notes known to be counterfeit should be m ark ed counterfeit and sent directly to the n earest office of the U. S. S ecret Service in accordance w ith rules specified by the local Reserve B ank or branch. Suspected counterfeit notes should be segregated from all other currency shipm ents to the central bank. Finally, except as provided in the operatin g c irc u la r or letter of the local Reserve B ank facility, foreign p ap er currency shouldn’t be shipped to the local Reserve B ank or branch. Coin Deposits And Shipments Coin deposited a t the F ed eral Reserve should be verified through w eighing or 26 piece counting before shipm ent. All coin should be bagged in bulk, w ithout w rappers, and segregated by denomination. Specifically, when deposits are m ade by m eans other than insured fourth-class m ail, bags of pennies should contain $50; nickels $200; dimes, quarters, half-dollars and large dollars $1,000; and A nthony dollars $2,000. When coins a re shipped by insured fourth-class mail, bags of large dollar coins, half-dollars, quarters, and dimes should contain $500; pennies $50; nickels $200; and Anthony dollars $2,000. E ach bag should be secured w ith a crim ped seal, heavy duty stitching, or other sim ilar secure method. If a crim ped seal is used, the seal should indicate the nam e of the institution. Coins which are considered to be worn, b u t which clearly show denomination and a re considered genuine, should be re tu rn ed to the F ed eral Reserve B ank or branch in a separate b ag m arked “worn coin.” The coins should be separated by denomination. Coins which are bent, p a rtial or fused should be sent to the U.S. Assay Office, 32 Old Slip Street, New York, N.Y. 10005. T reasury rules re g a rd in g the m eans of sending the coin to the Assay Office are available from the local Reserve B ank or b ranch cash officer. W ith certain exceptions, foreign coins shouldn’t be sent to Reserve Banks or branches. The exceptions are shown in the operatin g c irc u la r or letter of the local Reserve Bank. 27 Cash Transportation Is Priced In m id-January 1982, F ed eral Reserve Banks and branches, as required by the M onetary Control Act, began c h a rg in g depository institutions for transportation of cash. The pricin g proposal was published in N ovem ber 1981, and will be in effect in 1982. Details of the pricin g schedule and service rules are shown in the operating circulars or letters of each Reserve Bank. R egardless of prices set in 1982, the central bank intends to annually review charges. However, in general, charges are not levied if an institution delivers cash directly to the local Reserve B ank or branch, or picks up cash directly from the Reserve Bank facility. C harges a re not applied for verifying p ap er currency and coin; and canceling and destroying currency. These operations are considered governm ent services. Indeed, before Reserve Banks were established, nine subtreasuries across the nation m et p ap er currency and coin needs of institutions in the U.S. From 1914 to 1923, the F ederal Reserve System and the subtreasuries shared the responsibility. Equality Of Charges In establishing price guidelines for shipm ents by c a rrie r, the F ederal Reserve focused on en suring equality of charges to avoid penalizing an institution because of its rem ote location from the d istric t Reserve B ank or its branches. 28 Cash tran sp o rtatio n service fees also reflect System costs, based upon existing arm ored c a rrie r contracts—which include labor and fuel costs—and established usage p atterns. In addition, the fee schedule and the level of service to be provided will be adm inistered to respond to changing m ark e t conditions and dem ands for service. The fee schedules apply a m ark-up of 16 percent, as a private sector adjustm ent factor, only to the System ’s adm inistrative costs in providing coin and currency tran sp o rtatio n services. B ut an u p w a rd ad justm ent is not m ade to other costs, such as arm ored c a rrie r contracts. Coin Wrapping Charges Reserve Banks and branches also will continue to charge fees for coin w rap p in g service. C urrently, only two Reserve Banks offer the service—Boston and Cleveland. Details of the w rap p in g service are explained in the operatin g c irc u la r or letter of the two Reserve Banks. Com m ercial coin w rap p in g services a re norm ally available in m ost Reserve Bank cities. Depository institutions are responsible for m aking necessary arran g em en ts. 29 Petty Cash * The “M int A ct” of A pril 1792 specified the money of th e U.S. be expressed in dollars, and p a rts be expressed as “dism es” or tenths, cents or hundredths, and m illes or thousandths. * The w ord “dollar” is derived from a large silver coin, the “Jo achim sthaler,” which was m inted about 1518 in the Bohem ian valley (thal) of St. Joachim . The word was modified in various nations, including E ngland, w here it w as called “dollar.” The word “do llar” also appears a t least tw ice in Shakespeare’s plays: “M acbeth,” and “The T em pest.” * The origin of the dollar sign —$— probably stem s from the practice of w ritin g the letter “s” in pesos or p iastres over the le tte r “p.” * The Constitution of the U.S, A rticle I, section 8 specifies the Congress shall have the power “to coin money (and) reg u late the value thereof....” The F ed eral Reserve A ct g ran te d au th o rity to the F e d e ra l Reserve to issue currency, which “shall be obligations of the U .S .....” Public Law 89-91, the Coinage A ct of Ju ly 1965, declared “all coins and currencies of the U.S. (including F e d e ra l Reserve Notes...) shall be legal ten d e r for all debts, public and private, public charges, taxes, duties, and dues.” The A ct supplem ented a sim ilar provision in effect since 1933. * The original F ed eral Reserve Act, passed in 1913, req u ired the F e d e ra l Reserve B anks to hold a gold reserve of a t least 40 percen t ag ain st F ed eral Reserve Notes in circulation and 35 percent ag ain st deposits. One of the reasons for the req u irem en t 30 was to ensure the interconvertibility of gold coin, notes and deposits. The original gold reserve req u irem e n t rem ained in effect until Ju n e 12, 1945, when Congress reduced the req u irem e n t to a m ininum of 25 percent ag ain st both F ed eral Reserve Note and deposit liabilities. The 25 percent req u irem e n t against deposit liabilities w as elim inated M arch 3,1965. The 25 percent req u irem e n t ag ain st F e d e ra l Reserve Notes rem ained in effect until M arch 19, 1968. The 1968 am endm ent to the A ct suspending the gold reserve req u irem e n t on Notes also suspended certain ta x penalties upon the Reserve Banks. * Spanish eight-reales pieces (pieces of eight) w ere used in the U.S. following developm ent of tra d e w ith the W est Indies. The coins rem ained in circulation, with official sanction, until 1857. To m ake change, the coins w ere often cut into pieces; one h alf was called “four bits,” and a q u a rte r “two bits.” * The motto “E P lu rib u s U n u m ” (Out of Many, One) firs t appeared on the 1795 half eagle. It also has been on the G reat Seal of the U.S. on $1 notes since series 1935. The G reat Seal incorporates a variety of symbols, m any w ith the n u m b er 13 (13 stars, 13 stripes, 13 leaves and 13 b erries in the olive branch, and 13 arrows). The 13 arrow s rep resen t the fig h t of the colonies for liberty. The L atin motto also contains 13 letters. * The G reat Seal also contains the Rom an n u m erals M DCCLXXVI (1776) and two Latin phrases: “A nnuit Coeptis” (He H as Favored O ur U ndertakings); and Novus Ordo Seclorum ” (A New O rder Of The Ages.) * “In God We T ru s t” first appeared on a two-cent bronze coin m inted tow ard the end of the Civil W ar. The inscription has been on the one-cent piece since 1909, the dim e 31 since 1916 and the nickel since 1938. The motto also appeared on the nickel from 1866 to 1883. The $1 silver certificate p u t into circulation in late 1957 w as the first p aper cu rren cy in the U.S. to b e a r the inscription. C u rren tly it is incorporated in all denominations. * The T re asu ry seal ap p ears on all pa p e r currency. U ntil 1968 it was encircled by the L atin phrase “Thesaur. A m er. Septent. Sigil.,” the abbreviation of “Thesauri A m ericae Septentrionalis Sigillum ,” or The Seal of the T reasu ry of N orth Am erica. A new seal, approved in J a n u a ry 1968, inscribed “The D ep artm en t of the T re asu ry ” and the y e a r 1789, the founding of the departm en t. * The color of the T reasu ry seal varies by the kind of currency: blue for silver certificates, red for U.S. Notes, yellow for gold certificates, g reen for F ederal Reserve Notes, and brow n for F e d e ra l Reserve B ank Notes and N ational B ank Notes. * All F e d e ra l Reserve Notes show a seal in dicating the Reserve B ank of which it is a liability. The letter in the center m atches the Reserve D istrict n u m b er (Boston, first district, “A ,” San Francisco, tw elfth district, “L”). U ntil about the end of the 1970s a Reserve B ank only issued the c u rre n c y b ea rin g its seal. In recent years, notes are som etim es tra n s fe rre d betw een Reserve B anks and issued in the other district. Bookkeeping entries a re m ade betw een the Reserve Banks to account for the transfers. * P a p e r currency also contains the sig n atu re of the T re a su re r of the U.S. and the S ecretary of the T reasury. F e d e ra l Reserve Notes a re obligations of the U.S. and are the firs t liens on all assets of th e issuing F e d e ra l Reserve Bank. F u rth e r, custom and 32 law has req u ired F ed eral Reserve Notes, as well as e a rlie r currency, to be in “form and tenor as directed by the S ecretary ” of the T reasury. As early as 1861, the law, re fe rrin g to T reasury Dem and Notes, specified they m u st be “countersigned by such other officer or officers of the T reasury as the Secretary...m ay designate....” * U ntil early 1862, notes were signed by T reasury employes w ith th eir own nam es following the phrase “for the R egister” and “for the T re a su re r.” E ngraved signatures of T reasury officials w ere used th ereafter. * O ther F ederal Reserve System m aterials focusing on U.S. money include: “Coins and C urrency” (F ederal Reserve B ank of New York); “Counterfeit” (Federal Reserve Bank of A tlanta); “Fedpoints 1: How Money Gets Into C irculation” (Federal Reserve Bank of New York); “Counterfeit Points” (F ederal Reserve B ank of Boston); “Fedpoints 11: C urrency D estruction” (F ederal Reserve Bank of New York); “F und am en tal Facts A bout U nited States Money” (F ederal Reserve Bank of Atlanta); “The Story of Money” (F ederal Reserve Bank of New York); and “U.S. C urrency” (Board of Governors). Single copies of the publications are available free from the publishing institution. 33
@FedFRASER