Despite the increasing use of electronic payments and credit cards, currency remains the most familiar medium for face-to-face transactions in the U.S. economy. In addition, U.S. currency—unique among the world's currencies—is widely held as a store of value and used as a medium of exchange outside its home country. Although some U.S. currency has flowed out of the United States since before the Second World War, outflows accelerated during the 1970s. Today, the Treasury and Board of Governors staffs estimate that nearly 60 percent of all U.S. banknotes in circulation, or close to $500 billion, is held outside the United States.
U.S. banknotes are an attractive asset to residents of nations with political or economic uncertainty. Much of the recent growth in demand for U.S. banknotes has been in countries of the former Soviet Union and Latin America. Indeed, anecdotal press reports tell of Moscow taxi drivers insisting to be paid in U.S. dollars rather than rubles. Other stories tell of merchants in the most remote areas of China accepting—and giving change—in U.S. banknotes. The extensive, widespread use of U.S. banknotes benefits American taxpayers because, unlike Treasury bonds, the banknotes are a liability of the Treasury on which no interest is paid. The use of the banknotes also is a social and economic benefit to the residents of foreign countries who might otherwise lack a currency that is stable in value and widely accepted in transactions.
This same popularity also is a curse, encouraging counterfeiting of U.S. banknotes. Counterfeiters range from the casual, who produce a few notes with desktop scanners and ink jet printers or with color copiers, to professionals using sophisticated lithographic printing systems, to foreign governments such as North Korea that are reported to print counterfeit "supernotes" on government-owned intaglio presses.
Despite the temptation and potential profit from counterfeiting, the Treasury and Federal Reserve estimate that the frequency of counterfeiting is low, approximately one note in 10,000 both in the United States and abroad. At Federal Reserve cash offices during 2005, the most frequently counterfeited notes were $100 denominations at 44.1 notes per million processed, followed by the $10 notes at 7.8 notes per million. Overall, 6.4 counterfeit notes were detected per million notes processed.
Internationally, the major challenger to U.S. banknotes is the euro; the euro is the only paper currency other than U.S. banknotes held extensively outside its own currency area. Published reports suggest that counterfeit activity in Europe decreased sharply following the introduction of euro notes in 1999, but increased somewhat thereafter. For 2003-2006, the European Central Bank reports detecting and confiscating annually approximately 600,000 counterfeit notes, vs. the 10 billion euro notes in circulation, a rate not noticeably different than the detection rate for U.S. banknotes at Federal Reserve cash offices.
Technological innovations in color copying, scanning and printing have intensified the race between increasingly sophisticated banknote counterfeiters and government banknote designers. Perhaps the most difficult-to-duplicate counterfeit deterrence feature of U.S. banknotes is its unique yellow-green paper, manufactured under close security by a single U.S. firm from a mixture of 75 percent cotton and 25 percent flax. When combined with intaglio-printed images and numerals, this gives the notes a unique "feel," which surveys have reported is the most common method of counterfeit detection by the public and bank employees. Magnetic ink also is an important feature, difficult to duplicate; high-speed scanners most frequently detect counterfeit notes due to incorrect or missing magnetic signatures.
Color-shifting ink, larger portraits, watermarks and security threads are among the features that the public can use to detect counterfeiting without sophisticated equipment.
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Fed in Print: An index of the economic research conducted by the Fed.