The Role of the Federal Reserve
The Federal Reserve Board is the issuing authority for Federal Reserve notes and ensures that there is enough cash in circulation to meet the public's demand. The Federal Reserve Banks distribute, receive, and process Federal Reserve notes and distribute and receive coin through depository institutions. The 28 Federal Reserve Bank cash offices provide cash services to approximately 8,400 banks, savings and loans, and credit unions in the United States. The remaining depository institutions obtain currency and coin from correspondent banks rather than directly from the Federal Reserve. Together, the Board and the Reserve Banks work to maintain confidence in and the integrity of U.S. currency.
The amount of currency in circulation depends on the public's demand for currency. Domestic demand largely results from the use of currency in transactions and is influenced primarily by prices for goods and services, income levels, and the availability of alternative payment methods. Domestic demand for currency, however, accounts for only part of the total demand. Foreign demand is influenced primarily by political and economic uncertainties. The Federal Reserve estimates that between one-half and two-thirds of the value of U.S. currency in circulation is held abroad. Some residents of foreign countries hold dollars as a store of value, while others use it as a medium of exchange.
Each year, the Federal Reserve Board determines the number of new Federal Reserve notes that are needed to meet the public's demand and submits a print order to the Treasury's Bureau of Engraving and Printing (BEP). The order reflects the Board's assessment of the expected growth rates for payments of currency to and receipts of currency from circulation. The Federal Reserve pays the BEP the cost of printing new currency and arranges and pays the cost of transporting the currency from the BEP facilities in Washington, D.C., and Fort Worth, Texas, to Reserve Bank cash offices.
When a depository institution orders currency from a Reserve Bank, the Reserve Bank prepares and releases the shipment to an armored carrier. When a depository institution deposits currency with a Reserve Bank, the Reserve Bank stores the currency in secure vaults until it is verified, note-by-note, on sophisticated processing equipment. During the piece-verification process, currency is counted, suspect counterfeit notes are identified, and unfit notes are destroyed. The fit currency is packaged and returned to the vault, and is used to fill future orders from depository institutions. The Reserve Banks send all suspect counterfeit notes to the United States Secret Service for examination and final adjudication.
More than 99 percent of all U.S. currency in circulation is in the form of Federal Reserve notes; the remainder includes United States notes, national bank notes, and silver certificates, all of which remain legal tender.
The Federal Reserve's role in coin operations is more limited than its role in currency operations. As the issuing authority for coins, the United States Mint determines annual coin production. The Reserve Banks, however, influence the process by providing the Mint with monthly coin orders and a 12-month rolling coin-order forecast. The Mint transports the coin from its production facilities in Philadelphia and Denver to all of the Reserve Banks and the Reserve Banks' coin terminal locations.
The Reserve Banks distribute new and circulated coin to depository institutions to meet the public's demand. While the Reserve Banks store some coin in their vaults, they also contract with coin terminals, which are operated by armored carriers, to store, receive, and distribute coin on behalf of the Reserve Banks.
Federal Reserve Accounting for Currency and Coin
Federal Reserve notes are liabilities on the Federal Reserve's balance sheet. The asset counterpart to these liabilities is typically U.S. Treasury securities, mortgage-backed securities, and other assets. The Federal Reserve receives interest earnings from the assets that collateralize Federal Reserve notes. The income of the Federal Reserve System is derived primarily from the interest on U.S. government securities that it has acquired through open market operations. After it pays its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury. About 95 percent of the Reserve Banks' net earnings have been paid into the Treasury since the Federal Reserve System began operations in 1914. When a depository institution orders and deposits currency from its servicing Reserve Bank, the institution's account balance is adjusted accordingly.
Coin held by the Reserve Banks is an asset on its balance sheet and the Reserve Banks buy coin from the Mint at face value. When a depository institution orders and deposits coin from its servicing Reserve Bank, the institution's account balance is adjusted accordingly.