As of July 2013, currency in circulationthat is, U.S. coins and paper currency in the hands of the publictotaled about $1.2 trillion 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
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 declinesafter the holiday season, for examplebanks 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
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 5.9 years; a $100 bill lasts about 15 years.
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 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 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 value 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.July 2013