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Home » Publications » Academic journals » Economics journals » Economic Commentary (Cleveland) » October 1998 »
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    Bauer, Paul W.. "Currency: time for change?." Economic Commentary (Cleveland). Federal Reserve Bank of Cleveland. 1998. HighBeam Research. 20 Apr. 2018 <https://www.highbeam.com>.

    Chicago

    Bauer, Paul W.. "Currency: time for change?." Economic Commentary (Cleveland). 1998. HighBeam Research. (April 20, 2018). https://www.highbeam.com/doc/1G1-53972723.html

    APA

    Bauer, Paul W.. "Currency: time for change?." Economic Commentary (Cleveland). Federal Reserve Bank of Cleveland. 1998. Retrieved April 20, 2018 from HighBeam Research: https://www.highbeam.com/doc/1G1-53972723.html

    Please use HighBeam citations as a starting point only. Not all required citation information is available for every article, and citation requirements change over time.

Currency: time for change?

Economic Commentary (Cleveland)
Economic Commentary (Cleveland)

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October 1, 1998 | Bauer, Paul W. | Copyright
Copyright Federal Reserve Bank of Cleveland. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights or concerns about this content should be directed to Customer Service.
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    <a href="https://www.highbeam.com/doc/1G1-53972723.html" title="Currency: time for change? | HighBeam Research">Currency: time for change?</a>

Despite the increasing usage of credit and debit cards and the emergence of various electronic payment instruments, currency remains king - at least if that title is based on volume of transactions.(1) Maintaining the quality of Federal Reserve notes in circulation represents the single largest expenditure by Reserve Banks: Roughly $700 million a year is spent to buy new notes from the Bureau of Engraving and Printing and to process, store, and distribute notes.

While these costs are high, the value to users and holders of currency is much greater, indicated by the roughly $20 billion yearly in interest payments that consumers willingly forego by holding $460 billion of their wealth in the form of Federal Reserve notes.(2)

But, given some analysts' optimistic predictions that new forms of payment instruments, generically called e-money, will soon acquire a significant share of transactions, why should any effort be expended worrying about how paper currency is supplied? After all, why rearrange the deck chairs on the Titanic? Past experience suggests that the public is very conservative in its selection of payment instruments, and new instruments gain acceptance very slowly. More than 20 years ago, many people were predicting that electronic funds transfers would be the demise of the paper check. Only now, however, are electronic check presentment and automated clearinghouse payments significantly impacting paper check volumes. As this case illustrates, predicting the future course of a payment instrument's usage is an uncertain endeavor.

In addressing the challenges to paper currency posed by both existing and emerging payment instruments, the Federal Reserve must have clear goals for the provision of currency. Consistent with that objective, the Federal Reserve also must provide currency in the most cost-effective manner possible. After examining the Federal Reserve's current role in the provision of currency, this Economic Commentary explores the challenges and opportunities in developing forward-looking currency policies.(3)

* Currency Provision Today

The role of the Federal Reserve in maintaining the quality of currency circulating in the economy parallels that of the kidneys in maintaining the quality of blood circulating in the body. Toxins (counterfeit notes) and damaged blood cells (unfit notes) must be culled. This happens somewhat haphazardly, because blood cells (like currency) do not pass through the kidneys (a Federal Reserve site) on a predictable schedule.

The Federal Reserve maintains 37 sites throughout the United States for currency processing and distribution.(4) Expenses for these services exceed $280 million a year, while the cost of purchasing new notes from the Bureau of Engraving and Printing totals more than $400 million a year. In return, the nation's stock of more than 18 billion outstanding Federal Reserve notes - a total value of $400 billion - is maintained at a high level of fitness and integrity, the two components of note quality. …


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