New York Fed: The Trouble with Money

From the Federal Reserve Bank of New York's Liberty Street Economics blog:

“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, but $1 bills have the shortest, and have to be replaced every twenty-one months 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....MORE