Just Explain It

What happens to old money?

If you look in your wallet, you’ll probably find some “unfit currency” in there – bills that are worn, torn, stained, wrinkled, wadded up or just plain gross. We all deal with those kinds of bills. What you may not know, however, is that the nation’s supply of currency is refreshed nearly every day and cleansed of cash that’s past its prime.

The Federal Reserve is responsible for putting new money into circulation and taking old money out. Banks send excess currency they don’t need to one of 28 Fed cash offices all around the country, in armored vehicles under tight security. Then, the Fed runs all that cash through sophisticated sorting machines that count it, check for counterfeits, and cull the bills considered unfit.

Here are some examples of what the Fed considers to be “unfit”:
- If a bill has holes totaling more than 19 square millimeters, about the size of an aspirin, it’s unfit.
- Dirty and worn out bills are also sorted out with sensors.
- Fives, tens and twenty-dollar bills printed before 1996 are automatically pulled from circulation, simply because of their age.

The Fed places one order with the U.S. Bureau of Engraving and Printing each year for the amount of currency it anticipates needing the following year. Last July, for instance, the Fed ordered nearly 7.8 billion individual notes with a face value of more than $297 billion.

More than 90% of the new currency the Fed orders each year is used to replace old currency that’s taken out and destroyed, on a one-for-one basis. The rest is based on the amount of cash the Fed anticipates banks, businesses and consumers will need in the coming year.

The Fed replaces unfit bills with fresh ones at no charge to the banks, and that money ends up in circulation once the banks reclaim their cash.

Under tight security, the unfit currency goes to a shredder. A few shreds of currency end up bagged as souvenirs for Fed visitors and VIPs. The rest used to end up in landfills, but these days the Fed recycles nearly 90% of the dinero it destroys. That shredded cash ends up as mulch, compost, potting soil, fuel pellets, and even insulation for homeowners who probably have no idea what’s in their walls.

Demand for cash, one-hundred-dollar bills, in particular, tends to go up when there’s turmoil in developing nations that might threaten the value of their own currencies. That’s because people in those countries tend to hoard Benjamins as a store of value during a crisis.

But the demand for U.S. currency is usually pretty stable. In 2013, the Fed circulated about 1.5% more currency than in 2012. In case you’re wondering, this has nothing to do with inflation, which these days is determined by the amount of money the Fed injects into the economy electronically, which can be far greater than the amount of paper currency entering circulation every year.

The Fed also rejects bills from banks that are less than 50% whole or contaminated in some way. This doesn’t happen very often, since most banks sort and check money themselves before sending it to the Fed. But for anybody who’s curious, the Fed’s web site features examples of cash that has been burnt, buried, infested with mold and even bloodied, making it unacceptable for exchange.

What’s the worst condition you’ve ever seen money in? Connect with us on Twitter and use the hashtag #JEI.

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