News at Smith

The Real Color of Money

Feb 25, 2015


Cash in a Digital World, from Printing Press to Shredder

By Kristen Fanarakis

SMITH BRAIN TRUST -- Most greenbacks are not green or even visible. Only about 10 percent of the U.S. supply exist as paper or coin. The rest move inside computers as binary code. You can’t touch them or put them in your pocket, but they still show up on the balance sheet of the Federal Reserve, the central bank that controls the amount of U.S. currency in circulation. No printing is necessary to create these liabilities on the books. When the Fed wants to expand the money supply, it accepts bank IOUs — called “securities” — and transfers the corresponding value electronically.

In less time than it takes an armored truck to pull out of the driveway of a Fed facility, recipient banks have new money to lend to their customers. Unlike bitcoins, the dollars generated through these electronic transactions are backed by the “full faith and credit” of the U.S. government. Businesses and consumers can spend the money using checks, debit cards, direct transfers and new mobile tools such as Apple Pay.

Digital technology enables many types of transactions not possible in past eras, which is why the Gates Foundation lobbies for the expansion of cashless options in its annual letter published Jan. 22, 2015. “Digital banking will give the poor more control over their assets and help them transform their lives,” the letter argues.

Among other advantages, digital banking opens doors to the formal economy. It’s how business gets done in the 21st century. Digital banking also reduces the costs — which have doubled since 1995 — of printing, transporting, verifying and destroying physical currency.

Despite these advantages, Americans still love their cash. Physical currency remains the leading payment instrument for many types of purchases, especially for small-value transactions.

Some consumers, leery of electronic tracking, prefer the anonymity of cash. Many of these people want to protect their privacy, while others want to evade taxes. The IRS estimates that more than $3 trillion in revenue was lost from 2000 to 2010 due to underreporting of income. That would have nearly plugged the last three years of budget deficits in the United States. California alone estimates it loses $800 million to $1.4 billion annually in the underground economy.

Cash also has psychological advantages for people trying to stay within a budget. “When you are spending cash, you see the pain of paying right there, because you see the money going out,” Smith professor Joydeep Srivastava says in a Dec. 2 conversation with CNBC about Apple Pay’s potential effect on shopping behavior. “Using cash allows consumers to see, dollar for dollar, just how much they’re spending, something they don't experience with a credit card — or a smartphone.”

Cash also serves as a reliable payment method when digital technology is unavailable — like when the babysitter or taxi driver does not have a card reader. To meet the demand for cash, the Fed kept about $1.34 trillion in circulation as of January 7, 2015. That would be enough for everyone on the planet to carry $191 plus change in their wallets.

Few people worry about where all this cash comes from, as long as their local ATM never runs out. Yet each dollar has a story to tell. For the curious or concerned, this PDF graphic from the Center for Financial Policy shows the lifecycle of cash from printing press to shredder, along with an overview of how Americans use money in their everyday lives.

Kristen Fanarakis is Assistant Director of the Center for Financial Policy at the University of Maryland’s Robert H. Smith School of Business. She has more than a decade of experience on Wall Street and an MBA from the University of North Carolina’s Kenan-Flagler School of Business. She also holds a Master of Science in international economics from Suffolk University.

Meet Your Money: 10 Things You Never Knew About U.S. Currency

1. The majority of cash in circulation today is outside the United States.
2. People typically visit ATMs over the weekend, so there is more cash in circulation on Mondays than on Fridays.
3. ATM technology has led some banks to request used bills from the Federal Reserve because they work better in the machines than new bills.
4. The Bureau of Engraving and Printing used 8.9 tons of ink per day in 2014.
5. The largest note ever printed was the $100,000 Gold Certificate, issued to Federal Reserve banks from 1934 to 1935. These notes were not circulated among the general public.
6. Currency “paper” is more cloth than paper. It is made from cotton and linen by the Crane Paper Company in Dalton, Mass.
7. Diners Club issued the first credit card in 1950.
8. The U.S. Mint operated an official branch in Manila, Philippines, until 1941. Coins produced here carried the "M" mintmark.
9. Pennies and nickels cost more than their face value to produce.
10. Historians believe the dollar sign evolved from the Mexican or Spanish “P” for pesos, piastres or pieces of eight. Old manuscripts show that “S” gradually came to be written over the “P,” resulting in something like the “$” mark.

Sources: Federal Reserve, U.S. Department of the Treasury,, History Channel


About the University of Maryland's Robert H. Smith School of Business

The Robert H. Smith School of Business is an internationally recognized leader in management education and research. One of 12 colleges and schools at the University of Maryland, College Park, the Smith School offers undergraduate, full-time and part-time MBA, executive MBA, online MBA, specialty master's, PhD and executive education programs, as well as outreach services to the corporate community. The school offers its degree, custom and certification programs in learning locations in North America and Asia.

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