As the nation's central bank, the Federal Reserve issues, distributes, processes, and accounts for Federal Reserve notes and coin in the United States and abroad. Congress passed the Federal Reserve Act in 1913, which mandated an elastic currency that would expand and contract based on public demand. The thirty-seven Federal Reserve Bank cash offices provide cash services to more than 10,300 of the 19,000 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.

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 the political and economic uncertainties associated with certain foreign currencies. Recent estimates show that between one-half and two-thirds of the value of 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.

Currency
Federal Reserve notes make up more than 99 percent of all U.S. currency in circulation; the remainder includes United States notes, national bank notes, and silver certificates, all of which remain legal tender. Each year, the Federal Reserve Board determines new currency demand and submits a print order to the Treasury's Bureau of Engraving and Printing (BEP). The order represents the Federal Reserve System's estimate of the amount of currency that the public will demand in the upcoming year and reflects estimated changes in currency usage and destruction rates of unfit currency. 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 all Reserve Bank cash offices. From 1993 to 2003, the value of currency in circulation increased 100.4 percent to $690.2 billion, which represents an average annual growth rate of 7.2 percent.

When a depository institution orders currency from a Reserve Bank, the Reserve Bank prepares and pays the shipment out to an armored carrier company that is arranged by the depository institution. When a depository institution deposits excess and unfit 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, deposited currency is counted, suspect counterfeit notes are identified, and unfit notes are destroyed. The fit currency is packaged and returned to the secure vault and is used to fill future currency orders.

The Federal Reserve distributes a large amount of currency to overseas markets through Extended Custodial Inventory (ECI) facilities and other depository institutions. The Federal Reserve established ECIs in 1996 to facilitate the introduction of new-design U.S. currency to the international community, to recirculate fit bank notes in overseas markets, and to strengthen the information on foreign use and counterfeiting of U.S. currency. The ECI program allows selected depository institutions to hold currency in their vaults but to carry the inventory on the books of the Federal Reserve.

Coin
The Federal Reserve's role in coin operations is more limited than its role in currency. Rather than determine the annual coin production, the Federal Reserve, using its forecasting model, provides input to the annual order process. The U.S. Mint, however, determines the annual coin production and monitors the Reserve Banks' coin inventories weekly to identify trends in coin demand. To help the Mint plan its monthly production, the Federal Reserve also provides the Mint with monthly coin orders. The Mint transports the coin from its production facilities for circulating coin in Philadelphia and Denver to all of the Reserve Banks.

The Federal Reserve's Cash Product Office (CPO) oversees the centralized management of coin. The CPO coordinates the distribution of coin from the Mint to the Reserve Banks and acts as liaison among the Mint and the Reserve Banks. The CPO also monitors System-level inventories and coordinates the redistribution of coin inventories between the Reserve Banks.

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 more than 170 coin terminals to store, process, and distribute coin on behalf of the Federal Reserve. Armored carrier companies generally operate the coin terminals; the coin terminal arrangement has improved the efficiency of the coin-distribution system.

Federal Reserve Accounting for Currency and Coin
Federal Reserve notes are liabilities on the Federal Reserve's balance sheet. The asset counterpart to the Federal Reserve liability takes the form of securities of the U.S. Treasury and government-approved enterprises (Treasury and federal agency securities represent the majority of the total collateral for currency in circulation). Because the value of currency in circulation changes daily, the Reserve Banks monitor and report changes in net payments to the Board. Net payments represent the difference between the amount of currency that the Reserve Banks pay to and receive from depository institutions. If net payments are positive, the Federal Reserve will typically purchase securities through open market operations in an amount equal to the net increase of currency in circulation to offset the monetary policy implications of the drain on depository institutions' balances held at the Reserve Banks. Similarly, if net payments are negative, the Federal Reserve will typically sell securities in an amount equal to the decrease in currency in circulation. When a Reserve Bank makes a currency payment to a depository institution, the Reserve Bank charges the depository institution's account (or the account of the bank that acts as the settlement agent) for the amount of the order. Similarly, when a depository institution returns excess currency to a Reserve Bank, it receives a corresponding credit to its account.

Coin, however, is an asset on the balance sheet of the Federal Reserve and is a direct obligation of the U.S. Treasury. As an asset, the Federal Reserve buys coin from the Mint at face value. When a depository institution orders and deposits coin, its Reserve Bank adjusts the institution's account accordingly.