Historical Echoes: The Trouble with Money   Liberty Street Economics
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May 23, 2014

Historical Echoes: The Trouble with Money

Marja Vitti

“The trouble with money,” said a Federal Reserve Bank of New York publication in the 1960s, “as with all material things in the world, is that it does not last forever.” The Federal Reserve has the important task of adding liquidity to the market, but did you know that it is also responsible for removing money—literally—through currency destruction? U. S. currency is made of 25 percent linen and 75 percent cotton, which makes it pretty durable, but even so, currency is removed from circulation at a surprising rate. Each denomination of notes has its own life cycle, and $1 bills, for example, have to be replaced every 5.9 years or so.

     Even in its early days of operation, the Federal Reserve Bank of New York had strict guidelines for handling the transmission of currency. By the middle of the twentieth century, the cash processing procedures at Reserve Banks looked like this: $1, $5, and $10 notes deemed unfit for continued circulation were first “cancelled” by being fed into huge processing machines and punched with four diamond-shaped holes (two on the upper half and two on the bottom), which rendered the notes void. Larger denomination bills ($20 and up) were treated differently—they were cancelled by being cut lengthwise. The top halves stayed at the Reserve Bank, while the bottom halves (containing the Treasurer and Secretary signatures) were bound and sent to the Treasury for verification. Next, the cancelled bills—whether cut in half or hole-punched—were incinerated by the Reserve Banks. So was the diamond-shaped confetti punched from the lower denomination bills. And, as if once wasn’t enough, any remaining bits and pieces from the first burn were burned a second time, which is why the New York Fed once said there were only two ways unfit currency left the building: as ashes, or as smoke.

     As you can imagine, nationwide incineration soon became an environmental issue. The Clean Air Act of 1970 set important new standards for air quality overall, and even though the law did not provide guidance on currency incineration, the Federal Reserve Bank of New York put new pollution controls in place. It was not until the late 1970s that the Federal Reserve System officially discontinued currency incineration and employed a new method of currency destruction: shredding.

     Today, Reserve Banks are still responsible for disposing of unfit currency, but now use a “cutting-edge,” high-speed shred system. Unfit currency is first cut into confetti-like shreds, and then the shreds are transported to a removal system where they are compacted into dense pellets. The New York Fed destroys approximately five billion unfit notes each year; in 2012, the monetary value of the notes destroyed was over $42 billion. Having come a long way from using onsite and offsite furnaces, the New York Fed now sends its shredded currency waste to an organization to be composted. The trouble with money may remain, but at least the process has become “greener.”

Correction: The author updated this post to include a new life span for $1 bills.


Disclaimer
The views expressed in this post are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author.





Vitti_marja
Marja Vitti is an assistant curator in the Federal Reserve Bank of New York’s Legal Group.


Posted by Blog Author at 07:00:00 AM in Historical Echoes
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I didn't know that's how money was disposed, Marja, but I sure am glad they're no longer burning it (and not just once!) to get rid of it. I didn't think money disposal could be this troublesome. People should learn to handle their money wisely, both literally and figuratively.

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