Federal Reserve Currency and Coin Services

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 institutions 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 Secretary of the Treasury approves currency designs, and the Treasury’s Bureau of Engraving and Printing prints the notes.  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 country.  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 distribute 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 redesigned periodically to incorporate new anti-counterfeiting features.  When currency is redesigned, all previous Federal Reserve notes remain valid.

When currency flows back to the Reserve Banks, each deposit is counted, verified, and authenticated.  Notes that are too worn for recirculation (unfit 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 depository 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 currency 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.  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.  In 1960, these larger denominations 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. dollar is highly regarded throughout the world as a stable and readily negotiable 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.

Check Processing

While cash is convenient for small-dollar transactions, for larger-value transactions individuals, businesses, and governments generally use checks or electronic funds transfers.  Measured by the number used, checks continue to be the preferred noncash payment method; however, their use has begun to decline in favor of electronic methods.  In 2001, the Federal Reserve conducted an extensive survey on the use of checks and other noncash payment instruments in the United States and compared the results with a 1979 study of noncash payments and similar data collected in 1995.  The survey results indicated that check usage peaked sometime during the mid-1990s and has declined since then.  For example, the survey found that checks represented 59.5 percent of retail noncash payments in 2000, compared with 77.1 percent just five years earlier and 85.7 percent in 1979.  The total value of checks paid declined from an estimated $50.7 trillion in 1979 to $39.3 trillion in 2000 (both in 2000 dollars).

In 2004, the Federal Reserve conducted another study to determine the changes in noncash payments from 2000 to 2003.  That study found that the number of noncash payments had grown since 2000 and that checks were the only payment instrument being used less frequently than in 2000.

Of the estimated 36.7 billion checks paid in 2003, approximately 8.7 billion were “on-us checks,” that is, checks deposited in the same institution on which they were drawn.  In 2003, the Reserve Banks processed more than 58 percent of interbank checks, checks not drawn on the institution at which they were deposited.  Depository institutions cleared the remaining checks through private arrangements among themselves.  These private arrangements include sending checks directly to the depository institution on which they are drawn, depositing the checks for collection with a correspondent bank, or delivering the checks to a clearinghouse for exchange.  Processing interbank checks requires a mechanism for exchanging the checks as well as for the related movement of funds, or settlement, among the depository institutions involved.

For checks collected through the Reserve Banks, the account of the collecting institution is credited for the value of the deposited checks in accordance with the availability schedules maintained by the Reserve Banks.  These schedules reflect the time normally needed for the Reserve Banks to receive payments from the institutions on which the checks are drawn.  Credit is usually given on the day of deposit or the next business day.  In 2003, the Reserve Banks collected 16 billion checks with a value of $15.8 trillion.

Since it was established, the Federal Reserve has worked with the private sector to improve the efficiency and cost-effectiveness of the check-collection system.  Toward that end, the Federal Reserve and the banking industry developed bank routing numbers in the 1940s.  These numbers are still printed on checks to identify the institution on which a check is drawn and to which the check must be presented for payment.  In the 1950s, the magnetic ink character recognition (MICR) system for encoding pertinent data on checks was developed so that the data could be read electronically.  The MICR system contributed significantly to the automation of check processing.

In the 1970s, the Federal Reserve introduced a regional check-processing program to further improve the efficiency of check clearing, which resulted in an increase in the number of check-processing facilities throughout the country.  In response to the recent decline in overall check usage, the Reserve Banks began an initiative to better align Reserve Bank check-processing operations with the changing demand for those services.  As part of the initiative, the Reserve Banks standardized check processing, consolidated some operations, and reduced the overall number of their check-processing sites.

Other improvements in check collection have focused on when a customer has access to funds deposited in a bank.  Until the late 1980s, depository institutions were not required to make funds from check deposits available for withdrawal within specific time frames.  In 1988, the Federal Reserve Board adopted Regulation CC, Availability of Funds and Collection of Checks, which implemented the Expedited Funds Availability Act.  Regulation CC established maximum permissible hold periods for checks and other deposits, after which banks must make funds available for withdrawal.  It also established rules to speed the return of unpaid checks.  In late 1992, the Federal Reserve Board amended Regulation CC to permit all depository institutions to demand settlement in same-day funds from paying banks without paying presentment fees, provided presenting banks meet certain conditions.

In addition to processing paper checks more efficiently, the Federal Reserve has also encouraged check truncation, which improves efficiency by eliminating the need to transfer paper checks physically between institutions.  To that end, the Federal Reserve worked with Congress on the Check Clearing for the 21st Century Act, commonly known as Check 21, which became effective October 28, 2004.  Check 21 facilitates check truncation by creating a new negotiable instrument called a substitute check, which is the legal equivalent of an original check.  A substitute check is a paper reproduction of an original check that contains an image of the front and back of the original check and is suitable for automated processing, just as the original check is.  Check 21 allows depository institutions to truncate original checks, process check information electronically, and deliver substitute checks to depository institutions if they require paper checks.  In 2004, the Board amended Regulation CC to implement Check 21.

The Automated Clearinghouse

The automated clearinghouse (ACH) is an electronic payment system, developed jointly by the private sector and the Federal Reserve in the early 1970s as a more-efficient alternative to checks.  Since then, the ACH has evolved into a nationwide mechanism that processes credit and debit transfers electronically.  ACH credit transfers are used to make direct deposit payroll payments and corporate payments to vendors.  ACH debit transfers are used by consumers to authorize the payment of insurance premiums, mortgages, loans, and other bills from their account.  The ACH is also used by businesses to concentrate funds at a primary bank and to make payments to other businesses.  In 2003, the Reserve Banks processed 6.5 billion ACH payments with a value of $16.8 trillion.

The use of the ACH has evolved over time.  The ACH is now used to make certain payments initiated by telephone or over the Internet.  In addition, merchants that receive checks at the point of sale and banks that receive bill-payment checks in the mail are increasingly converting those checks into ACH payments.

In 2001, the Reserve Banks began a cross-border ACH service.  Legal and operational differences between countries have presented challenges to the rapid growth of the cross-border service; however, the Reserve Banks are continuing to work with financial institutions and ACH operators in other nations to address these challenges.

Depository institutions transmit ACH payments to the Reserve Banks in batches, rather than individually.  ACH funds transfers are generally processed within one to two days, according to designated schedules, and are delivered to receiving institutions several times a day, as they are processed.  The Reserve Banks offer ACH operator services to all depository institutions.  A private-sector processor also provides ACH operator services in competition with the Reserve Banks.  The Reserve Banks and the private-sector operator deliver ACH payments to participants in each other’s system in order to maintain a national ACH payment system.

Both the government and the commercial sectors use ACH payments.  Compared with checks, ACH transfers are less costly to process and provide greater certainty of payment to the receiver.  Initially, the federal government was the dominant user of the ACH and promoted its use for Social Security and payroll payments.  Since the early 1980s, commercial ACH volume has grown rapidly, and in 2003 it accounted for 86 percent of total ACH volume.

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