Published February 1, 1990 | February 1990 issue
Buried beneath the Minneapolis Fed's suspended office towerin a heavily secured basement leveland locked behind a 16-ton stainless steel door, is a vault containing about $600 million.
And that money doesn't just sit there.
Under close guard, about $17 million must be safely transported each day to 1,200 banks, savings and loans and credit unions through the Ninth District. The responsibility for those shipments, as well as the quality of the coin and currency, lies with the Minneapolis Fed's Money Department.
Although today the United States has a universally accepted form of currencythe Federal Reserve notethat was not always the case. In the late 18th century and throughout the 19th century, banks issued their own currency. Bills varied in appearance because each bank designed its own notes. Many of the notes were signed by the bank president and some even carried an engraved picture of the bank president.
Counterfeit money was not uncommon, severely taxing the confidence of consumers and shopkeepers. Not until the Civil War in 1861 did the problem begin to subside when the government issued the first U.S. notes. The National Banking Act of 1863 established national banks that would issue paper currency as a percentage of their holdings of U.S. government securities. Tying currency production to U.S. securities helped provide a safer currency system for the country. Federal Reserve notes, which began to appear when the Federal Reserve System was created in 1913, gradually emerged as the chief form of currency.
Although counterfeit money continues to surface from time to time, the extensive security measures and meticulous processing in place at the Federal Reserve Banks help to maintain the public's confidence in the U.S. currency system. High-speed machines sort thousands of bills every day, weeding out worn, tornand counterfeitbills. Money is stored in reinforced vaults, and access to Money Department working areas is restricted to authorized employees.
In addition to currency, the Money Department also monitors the Ninth District's coin supply and processes the district's food stamps. Coin terminals in Fargo, N.D., Sioux Falls, S.D., and Duluth, Minn., serve as distribution centers for parts of the region. In all, the Minneapolis Fed stores about $9 million in coin in its vault, with another $3.5 million at its outside locations. The Helena branch has about $4 million in coin and has no off-site holdings.
Food stamps, which are issued by the U.S. Department of Agriculture, are distributed to income-eligible people. Merchants accept the coupons like money and deposit them at their local bank. Banks, in turn, deposit the coupons at the Federal Reserve Bank, where they are counted and destroyed.
Len Fernelius, senior vice president, heads the 40-person Money Department staff at the Minneapolis Fed. All Money Department operations take place in the subterranean portions of the Minneapolis Fed building. The department's whirring machines work from 7 a.m. to 1 a.m. four days a week and from 7 a.m. to 3 p.m. on Fridays. That's enough time to process about 7 million bills per week.
Fed Banks receive money from financial institutions seeking safekeeping for their excess cash. The money, transferred either by armored car or registered mail, enters the Minneapolis Fed Bank's Money Department via a "security court" located in an underground parking area. Tellers accept the deposits and transfer the currency to money carts for delivery to the sorting and counting areas. People whose jobs require them to handle cash are subject to thorough background reviews before they're hired and periodic spot checks once they are on the job.
Bills come in stacks sorted by denomination, and straps band 100 bills, with 10 straps wrapped together in a bundle. In the sorting and counting areas, the straps are removed by hand and the money is loaded into one of two machines which count, sort and re-strap bills. Bills that are worn out, torn or otherwise "unfit" are shredded. (Used bills that are suitable for recirculation are known as "fit" bills.) The machines detect counterfeit bills, which also are sorted out. Before the current machines were installed nine years ago, counterfeit bills were detected by hand. Re-strapped currency is deposited into the Bank's vault for storage until needed for shipment to another financial institution.
Occasionally, the counts produced by the machines don't match the amounts indicated on deposit slips. Depositing financial institutions are liable for the difference. When banks anticipate a need for currency, they order it from the Federal Reserve Bank. Although the Fed cannot assure unlimited availability of new bills, banks have the option of requesting either new bills or fit bills.
"Banks often like new bills for their ATMs," Fernelius said, "and fit bills for their tellers, because they are easier to handle. Sometimes, there is a tendency for new bills to stick together."
Automated teller machines (ATMs) have dramatically changed the demand for new currency. A decade ago, most banks insisted on new bills to use in their ATMs. "Part of it was the image they were trying to build for their bank, but also there was the belief that the machines required new currency to function properly," said Bill Holm, Money Department assistant vice president.
"The Fed worked closely with several ATM manufacturers in 1988," Holm continued. "We did a lot of testing and found out that, in fact, machines do not need new currency. Some even work better with fit currency because those bills don't stick to one another.
"New machines today are becoming so sophisticated they can handle almost any kind of bill. Some even have anti-jamming systems that set aside unfit bills," Holm said.
The proliferation of ATMs also has affected the demand for specific note denominations. The popularity of the 20-dollar bill has increased dramatically since many older ATMs still in use only distribute 20s. Demand for the 20- dollar bill in the Ninth District is now about equal to demand for the one-dollar billlong the most popular of all bills. "Ones and 20s make up about 40 percent each of the total demand for currency," Holm said. Five-dollar bills are the next most popular note with 10s, 50s and 100s following in that order.
The Federal Reserve attempts to maximize the use of fit currency. New bills are provided by the U.S. Bureau of Engraving at a cost of 3 cents per bill, regardless of denomination. Banks do not pay for new bills, so this cost is passed on to taxpayers. The cost may rise, especially if the Bureau instigates new anti-counterfeit measures that may include embedding a horizontal thread in each bill which would be visible when held to the light.
Most currency is subjected to brisk circulation. The Fed initiated a study last year in which it surveyed bankers and citizens about the quality of currency. The results showed that 20 percent to 30 percent of the notes received by banks would not pass the Fed's standards for fit currency. The average life of a one-dollar bill is 18 months, with all other denominations lasting longer.
Appropriate disposal of shredded money is an important issue for the Money Department. The U.S. Treasury enforces precise regulations about shredding. It must be thorough enough, of course, to prevent people from equating value with any of the pieces should they find their way into the public. After the 1987 Minnesota Twins World Series parade in downtown Minneapolis, some people collected bits of shredded moneyused as confetti for the eventassuming they were valuable. When they brought the shreds to local banks, however, they learned the pieces were worthless.
Normally, shredded bills are disposed like most other garbage. Currently, at the Minneapolis Fed, shredded bills are burned at the downtown Minneapolis incinerator, the central garbage disposal site for Hennepin County.
Demand for Money Department services is growing rapidly. Five years ago, bank deposits averaged $9.8 million per day. Today, the Minneapolis Fed Bank averages about $15.5 million in daily deposits. The demand for currency is growing at a rate of about 5 percent to 7 percent per year. With the department's two existing high-speed machines, volume capacity will be reached in about two years, according to Fernelius.
The Federal Reserve already is working systemwide to replace existing machines with better ones. In addition to being faster, the new machines automatically will remove the paper strap around each package of money. Each machine will cost substantially more than the existing machines.
Other features to facilitate the money-handling process already have been implemented. For example, banks can order currency through an automated telephone system. In place for three years, the system allows bankers to use the buttons on a touch-tone phone to order exact amounts of needed currency. Once the order is placed, the machine reads it back to ensure accuracy. "The system is a great timesaver for us because it eliminates any confusion about what has been ordered," Holm said.
Ordering money is a serious job for bankers. "They need to plan ahead," Holm said. It generally takes two to three days before a bank actually receives ordered currency. Banks typically order currency so they have greater supplies on days consumers need money mostgenerally the days before weekends and holidays. The month of December also is a high demand period for currency, particularly new currency that customers frequently give as gifts.
The Minneapolis Fed, which handles about 85 percent of the district's currency needs, has an extensive armored car route network that serves much of the Dakotas, Minnesota, Wisconsin and Michigan's Upper Peninsula. The Helena, Mont., branch has an armored car route that covers much of Montana. Currency transportation costs are picked up by the financial institutions on the car routes. Banks with no armored car service rely on the U.S. mail for currency shipments. Banks are generally serviced once a week, although some areas only demand service every two weeks.
Banks located far from a Federal Reserve bank office, however, are not penalized. Money deposited in a Fed bank is credited the moment it is loaded onto the armored car. Currency ordered is not charged until it is received by the bank.