Odd Lots - How the Fed Distributes Billions of Dollars in Cash

Episode Date: February 13, 2025

We all know that the Federal Reserve tries to stabilize the economy by raising or cutting interest rates to balance inflation and unemployment. But the central bank’s mandate actually goes beyond monetary policy. The Fed is also responsible for reviewing and distributing billions of dollars in cash to banks all over the US. In this episode, we go deep inside the vaults of the Federal Reserve Bank of Chicago to see how physical money actually gets moved around. Chicago Fed President Austan Goolsbee is our guide for the tour, and you’ll hear how the central bank gets its cash, how it checks it for authenticity and condition, and how it gets currency to where it needs to be.Read more: Fed’s Goolsbee Sees Uncertainty Driving Shallower Rate-Cut Path Odd Lots is going to Washington, DC! Get your tickets here. See omnystudio.com/listener for privacy information.

Hey there, Oddlots listeners. It's Tracy Alloway. And Joe Wisenthau. We are very excited to announce that Oddlots is going to Washington. That's right. For the first time, we are going to do a live public Oddlots recording in our nation's capital. That's going to be March 12th in Washington, D.C. at the Miracle Theater. And guests will be announced in the coming days. But in the meantime, you can find a ticket link at Bloomberg.com slash Odlots. Podcasts Radio News.

Go forward until the other door shut. There's going to be one more we've got to go through, so come on in. Oh, wow. You can definitely get trapped in here. This is the trap, and everyone must come in, and the door must shut. And now we can go to the next door. Deep underground, coming through elevator, the sort of monochrome quietness, the uniforms. It kind of reminds me of severance a little bit.

Has anyone made that observation before? Hello and welcome to another episode of the All Thoughts podcast. I'm Tracy Alloway. Is this the one where we get severed, Tracy? My name is Joe Wisenthal and I freely consent to being severed. Joe, we are not getting the severance procedure, but we are about to go to a place that not many people get to see. We're going deep into the vaults of the Federal Reserve Bank of Chicago

to tour its cash operations and get an inside look at how money, is actually distributed. All right. Yes. Okay, welcome to cash. In this episode, we take a walk through the basement of the Chicago Fed, and we learn all about how the central bank processes and delivers cash. Cash operations, while not, quote, highly classified, like in the inner workings of the office

and the show, Severance, they're well beyond the public eye for obvious reasons. So this is a rare look or listen, I guess, at the inside. Yeah, and you're not actually allowed to take any pictures or videos in the inside the vaults. So an audio format actually does pretty well here. And this is all really interesting because we're used to thinking about the Fed in terms of monetary policy, raising or cutting interest rates to try to keep inflation in check and unemployment low. And there's stuff like bank regulation. Of course, we talk a lot about that on the show. All of that can feel very theoretical, but there's this very physical side to the Fed as well. That's totally right. The cash in your

wallet has got to come from somewhere, right? And a lot of it comes from the Fed. Or at least it moves through one of the 12 Federal Reserve banks. The Bureau of Engraving and Printing actually makes the money, and then it gets delivered and processed through the Fed banks. And the Chicago Fed building itself, I mean, it kind of looks exactly like how you might picture an old-fashioned bank. It has these giant, beautiful, neoclassical columns on the outside. And inside is where the magic happens. We see, set up a system in the United States with 12 reserve banks around the country because in 1913, as today, people were deeply uncomfortable with the financial system being run exclusively by New York City and Washington, D.C. So they wanted input from all around the country.

And one component of the job is monetary policy like we talk about all the time. That's Austin Gulsby, president of the Chicago Federal Reserve Bank. And you've probably heard him on the podcast a couple of times before, very recognizable voice. And he's usually, you know, talking about the macro environment monetary policy, things like that. But now you're going to hear him talk about something very different, being the bank behind the banks, the one that actually provides them with cold hard cash. We're also a real live working bank, and we got 17,800 employees. We are a bank to banks, and they have a master account. We pay interest on their deposits into that account, which are bank reserves, and we provide FedWire.

We do ACH direct deposit. We do Fed now. And one of the things we do is cash. It's one of the Fed financial services. And so if one of our member banks wants cash for their ATMs, they'll send in and say, just like you, in your account, you go down the ATM, you take some cash out. They say, we want cash to put in our ATM, so take that out of our master account.

They send a Brinkstruck over here, and they place an order, we count it out, we give it to them. If they have too much currency, they send it to us. us in the same rings truck. We take it in. We run it through machines. We count it. We pull out anything that's been signed or somebody spit on it or, you know, it's dirty and shred it. We process it, put it in our vaults, send it out the next day. And we get a bunch of shipments of brand new money from the Bureau engraving and printing. So it's a very live operation and you're going to see it. There are a lot of people work there. There's a lot of machinery and it's pretty neat. Pretty neat is putting it mildly because it turns out that

Austin loves giving the tours of the cash shop, something that was totally evident while we did it. I think most people in finance and economics love money, but Austin really loves money. Yeah. So join me and Joe and Austin on this special edition of Oddlots. as we follow how money actually moves through the Federal Reserve system. We are standing in the lobby of the Chicago Fed building. There's a beautiful staircase and a balcony that looks down on this gorgeous atrium. Apparently, there used to be machine guns mounted up there. And now there's security guards at the entrance, the Fed's own police force.

And as Austin mentioned earlier, the Chicago Fed was established in 1914. And back then, investors didn't have much reassurance that their bank deposits were, you know, actually safe. And after months of back and forth, Congress passed the Federal Reserve Act, establishing the Federal Reserve System and the 12 reserve banks that cover the entire country. And the Chicago Fed covers parts of Illinois, Indiana, Wisconsin, Michigan, and the state of Iowa. And as we've said before, we are used to talking about whether the Fed is doing a good job on things like inflation and unemployment, but we don't actually talk that much about its other big job, which is managing the money.

We know when we're doing a good job when you can go to an ATM and there's money in it. You can go to a grocery store and you can pay in cash and they have changed to give you in currency. Mike Kepler is an executive vice president of the district's cash operation and the Chicago Fed Central Bank service area. So essentially I oversee the full currency operation between our Chicago and Detroit offices. That includes everything from processing the currency on the high-speed machines. to paying orders to financial institutions in our district and taking money in. Even though we live in a world that's full of digital payment systems, cash still plays a role in everyday transactions.

Cash is Lindy. That's right, Joe. It's extremely important. So, you know, think about things like hurricanes or weather-related events or power outages where electronic payments don't work. In fact, that was in the store the other day and their credit card system was down. And fortunately, I had cash in my personal. pocket. So I was able to jump the line and get my stuff and get out the door while there's,

we're kind of waiting for the credit card machine to pop back up. So it is very important. And not all consumers use just one payment type. So in fact, you can imagine in today's times electronic payments, debit cards, credit cards are the primary two vehicles that folks use for transactions. But cash is a third, very close third for payments. And look, the thing is, as the share of payments that are made electronically mobile banking using cards rises, people have this tendency to say, oh, well, there is no cash. I don't even see cash. If you go look, and you can look on Fred, it's on there.

Currency and circulation as a share of GDP is over 10%, and that's among the highest percent on record. at least since the 1980s that you could find on Fred. That's double what it was in 2008. That's like four times higher as a percent than it was 40 years ago. And it's shockingly large per person. It's like $4,800 per person on average in money. Joe, I don't know about you, but I always keep $4,800.

hundred dollars in cash just in case I have to spontaneously buy like, I don't know, a MacBook Pro or something. Emergency lumber purchases, maybe a thousand chickens for you. That's right. Hi, Tracy. Nice to meet you. Hi, Joe. Great to meet you.

You can meet the AAA, the amazing Amy Alvarado. Welcome to Cash. We're glad you're here. Getting into the basement where the Chicago Fed's cash shops actually are is a process. There's a lot of cameras. There's a lot of security. and there's a lot of rules. So don't go fishing in your pockets.

Don't pull out your wallet while we're in. Right. So there's no putting your hands in your pockets and you're not allowed to carry anything with you. After going down in the elevator, I'm not even sure what floor we're actually on. And we have to pass through multiple security doors before we get here.

But when we do get there, it's pretty cool. We're in the transfer area where money comes in and processing begins. And let me tell you, there's money everywhere. So we're standing next to a big box filled with cash. How much would be in something like that? Full container of 20s is roughly $8.5 million. Wow. Joe, grab it quickly.

You'll see a lot of money as we walk around today. That's Amy Elverado, the bank's vice president of district cash operations. She oversees the entire process. Our team will go in the room and check all of the bags as the armored carriers drop them off. We'll make sure all the bags are intact and sealed and everything. We'll count them. We're doing this bag count and then we're signing off on it. That's when we would release the carriers.

And that's the transfer process coming in. There's a long hallway stretching out in front of us. The walls are white and there's rooms on either side that have large windows and glass doors. In fact, one of the most striking things about this place is just how much you can see. Everything is see-through, even the doors. Amy and Austin tell us that. transparency is paramount to the security of the whole operation, giving that they're dealing with, you know, cash.

A reason why these doors are clear is because we are never in the room with these carriers at the same time. The carriers will come in onto the concourse. They will unload their currency bags onto rolling screens, as we call them. They will put them in the room. They will go back out the other side of the room. When our team comes in the room, they're supposed to watch us flip all. those bags because it's still theirs at this point. And once we do that, we'll bring the work in.

But when we transfer work back out to them, same process happens. We go in the room, we drop off the currency, we come out, they come in. So we all need to be able to see through the glass of the transfer process happening. All of these security rules apply to employees to. People wear smocks. There are no pockets when they go in. The colors indicate who's doing what role. And we have very very good hygiene in an accounting sense. And it's a tough job. Cash, as it turns out, is pretty heavy when you're piling up millions of bills, millions of physical bills.

The Chicago Fed processes something like 5.5 million pieces a day, and the actual currency value of that can be higher depending on the denomination of the notes. Once the money comes into the Fed, the cash is brought into a receiving room, which is down another floor of the basement. This room looks very similar to the transfer room. And getting cash into the Fed is just the first part of this process. We would now open the bags and make sure we have the correct amount of bundles in each bag. And a bundle, as I'll point out, is what you see in these containers.

They look like little bricks. It's like a brick of cash. Like a brick of cash. And it is 10 straps of 100 notes, so a thousand notes per bundle or brick, as it looks like. And so we open those deposits up. we make sure we have the correct number of bundles, and this is where we're entering in the deposit ticket, and we're making sure that all of the accounting is correct at the bundle level,

and then all of the work out of these rooms get stored by denomination into containers, where they will be stored in vaults until it's time for their piece count verification. We make our way through more long, stretching hallways, until we get to a room where there are a couple of workers sorting through a bunch of cash, and most strikingly, a big machine that takes up most of the room with a computer on the left side and stacks of money neatly sitting on top of the tables. They call this a high-speed room. And that's the sound of cash being counted and measured very fast.

That is the sound of the currency going into the machine and it's singling those notes. So there's stacks of hundreds, right? They're going into that machine and they're kind of getting stacked on a rake and it is really pulling those notes. at rapid pace and then sending them singly one by one through the machine. So it's not quite Fed money printer go burr, but it is a high-speed money processor, go-Bur. Some people are going to be disappointed that the Fed is not literally printing the cash. Certainly we're imaging every strap that comes in here on the currency, so that information relates back to the banks that sent it in.

So we have that information. If there's any disputes, we certainly send that out to our financial. institutions. The machine will cut the straps off and then take each individual note, run it through our sensors, and it will make rapid decisions on whether it is fit for circulation or it would be shred or if it needs to have another look. So the sensors would be looking for things like if there's a mark on it or a tear or that sort of thing. Correct. It's checking the fitness level. So is it clean, is it soiled, it's checking the authenticity of it, it is checking that it's the correct denomination. So it's looking at all of those things very rapidly. Does human judgment ever come

into this or can it just be 100% machine determined? So any items that are rejected on the machine will go to a secondary process where the operators will handle notes by hand. They will feed them again through another set of sensors and it'll take that read. But the end determination on things like counterfeits, our staff are trained on counterfeits, they're tested on counterfeits, and they do make those decisions as they're looking at those notes. So as you can see the large machine we talked about here at the end of the machine and this tube that's going up into the ceiling, you can see the fluttering in that clear window. It looks like a bank, a drive-up tube or a pharmacy tube.

That's where the shreds are exiting our floor to go to our bricter. That's what it sounds like when they don't roll straight. Notice the wall guards. We have our bumpers for a reason. What happens to all the shredded money? I know you sell some in like the gift shop. We give it away. Oh, you give it away.

Oh, well, we definitely want some. But like what happens to the majority of it? Here it's sent out for recycling. Most Fed offices send it out to be recycled. Recycled back into future bills? No. Here it's turned into some sort of fuel. We send it out.

And other feds, it's different. Once the cash is all processed and sorted, it gets stored in the bank's vaults. And these vaults are huge. They look straight out of a movie. Think Ocean's 11, but bigger. So as we lock that in. You've got to lower the floor or the door cannot shut. Each door weighs like 80,000 pounds.

And you have to drop the floor to actually be able to open and shut them. So you just sort of have to envision that. If they tell you to keep your hands and arms inside the car, at all times, you do it in this one. The vaults are over 100 years old now, and it took over 220 trips to transfer the Chicago Fed's entire cash holdings from their previous location to this new site.

The wheel gets turning and locks it in place. Yeah, it's got kind of a master and commander's ship wheel feel to it. And what's the combination tool? market. There's multiple. And then we turn the dials on the combination, so that way it sets it back for the next business day so no one can just come in and open it.

As we walk around these halls down deep in the basement, there are screens showing live streams of outside of the Fed building. You can see the streets and sidewalks outside the bank. Why is that showing a video of the outside? So that is what we call the windows to the world, because as Austin mentioned, we are are in the basement and we want to know if it's raining and instead of calling Austin to ask him if it's raining we have our own window we don't have windows we got a second basement a third basement and you want to know is it sunny or okay so

we're gonna come around the corner here and then we're gonna step inside this is considered a working vault so you follow me in my gosh and so what we have in Here are two more paying rooms, just like we talked about outside. And then this vault, it has these working rooms, and then we have inventory storage. You can see some of our leadership is in here doing some work right now. But this is where we have the new inventory stored as well as some fit inventory and some of the orders that will go out tomorrow. This really smells the strongest, right? Yeah.

You just smell that smell? This is fresh money. fresh money. The smell of fresh money in the morning. This is probably what I remember most about the experience. The smell of new money. This is where the Fed keeps bills ready for distribution to banks. Yeah, in a room with millions of dollars in it, that smell is strong.

This is the room where you really get to appreciate the physical aspects of money. Because, as it turns out, dollars aren't just green. When they're all stacked up, you start to see there's a whole range of colors in there. And of course, there's that smell. That's a good smell. And it's funny, for the longer you work here, there is a thing really about nose blind because you don't really pick it up as much anymore as our visitors are always like, what is that smell?

Yeah, I went to the bureau engraving and printing. One of my quests was, where does the smell come in? Is it the paper? Is it the one? And there are big buckets of the green ink, and I took it. was like, that's it. That's the spell. And this room is where the fit money, all the stuff that's been processed by the high-speed machine gets paid out. That machine creates fit inventory, and that's on the right side of the room here, on the left side of the room, are there orders that they're going to be paying out tomorrow?

So our allocator will pull the orders like a grocery list. Those orders get downloaded. We have a list of how many bundles they want of each denomination. We'll fill it like a grocery list. the inventory on the table, and then the verifier will confirm blindly that count. We'll enter that work in once that count is balanced. They will bag it and tag it, put into their containers by armored carrier, and then that work will get stored in the vaults overnight, and tomorrow will be taking it up to where we do

our transfer process. Mike will have the exact numbers, but we pay out probably $140 million a day. $135 million a day. $135 million a day. and we take in 100 million a day, 119 million a day, and then you say, wait a minute, how can you pay out more than you get? It's because we get new money shipped in from Bureau of Graving and Printing. And it all comes full circle. The Bureau of Engraving and Printing, which has facilities in Washington, D.C. in Fort Worth, prints the money.

They ship it to the reserve banks where this whole process takes place, and then those bills go out to banks, ATMs, or wherever you're getting your cash. The life cycle of a bill is pretty interesting. That's where the money is printed. They put it on pallets. They ship it to the reserve banks and we receive it and you'll see it. It'll circulate for a few times. It will come back to the Fed for processing as it gets spent. It goes to a bank.

The bank puts it in deposit. They'll send it to us and say, we got too much currency. credit our deposit account. We'll count it, run it through the high-speed machine. If it's too dirty, we'll shred it. If it's fine, we'll bundle it up, put it in a package, and send it out to the next bank that needs more cash for their ATM. And that's kind of the cycle.

The money comes in, gets stuck in the vault, goes out the next day or whenever people want it, and it's supplemented by the new money that comes. from Bureau engraving and printing. In terms of a lifespan of a dollar bill or currency, it ranges somewhere from the $1 bill, I think, last an average of 6.6 years out in circulation versus, as you can imagine, the $100 bill,

less used, probably more of those people that keep it in their homes, under mattresses or whatever, that circulates every 22.9 years. So quite a bit of difference, but it varies based on the denomination. They're supposed to be a strict, Yeah, you can say. It's green. If you put the UV light right up against it, it gets brighter.

But there's a green strip. I don't know. I hope. We end our tour at the Chicago Fed's Money Museum, which is both fun and even though it's about money, it's actually free to enter. And you can learn even more about cash. Yeah, so if you're ever wondering which of the 12 Fed banks your money comes from, If you look at the bill, you see a big letter printed on each note.

On a $1 bill, it's just to the left of George Washington. F. Who's F? That's Atlanta. This is Atlanta money. No wonder it's not there. So you can see the letter in the corner. That's the equivalent of the G.

So B would be the second district. That'd be New York. C would be third district. So is that? Philadelphia? I think it might be. Philadelphia. Each letter corresponds to the regional Fed that it passed through. So if you're wondering what the Chicago Fed is, that's G, that's Chicago money. So the Chicago Fed will put in an order with

the Bureau of Engraving and printing for new cash, and that money will be made and sent to the Chicago Fed. And let me tell you, Joe, I will never look at cash the same way again. I will annoy everyone that I know by telling them which Fed Bank their money came from. And with that, our tour comes to an end, and we're thrown back out into the real cashless world, and we are blinded by the sun. Yeah, but we learned a lot, and how many people actually get to say they've seen billions of dollars in cash

without doing something illegal. All right, Tracy, I am ready for my waffles and dance partner. Let's go. Special thanks to Austin Goolsbee, Mike Kepler, Amy Alvarado, Mark Peters, and the staff at the Cash Operations Department of the Chicago Fed. This special look inside how the Fed stashes cash was written by Tracy Eloy and Carmen Rodriguez.

I'm Joe Wisenthal and together with Tracy, we co-host the Oddlots podcast. Carmen produced this episode with the help of Dashel Bennett and Kail Brooks. Blake Maples is our sound engineer. Brendan Noonim is our executive producer. Sage Bowman is the head of Bloomberg podcasts. If you enjoyed this special Oddlots episode, then please leave us a positive review on your favorite podcast platform. Thanks for listening.