FRB: Testimony, Allison -- New-design $50 notes and quality assurance -- October 1, 1997 The Federal Reserve Board eagle logo links to home page

Testimony of Theodore Allison
Assistant to the Board for Federal Reserve System Affairs
New-design $50 notes and quality assurance
Before the Subcommittee on Domestic and International Monetary Policy of the Committee on Banking and Financial Services, U.S. House of Representatives
October 1, 1997

Thank you for the opportunity to report on the Federal Reserve's plans for dealing with some new-design $50 notes that were imperfectly printed. My statement will address three matters: our view of the quality and quantity of $50 notes currently being produced by the Bureau of Engraving and Printing, the options we are looking into for handling the imperfect notes, and steps we are taking jointly with the Bureau of Engraving and Printing to better ensure that we are both satisfied with notes produced by the Bureau in the future.

Before turning to those matters, I want to emphasize that the Federal Reserve takes very seriously its stewardship of the Nation's currency. Our objective is to issue notes--new and previously circulated--that meet high standards of quality and security. Indeed, we believe that high quality reinforces security. In general, security features in currency notes are most effective in deterring counterfeiting, and therefore in inspiring confidence in genuine notes, when circulating notes are of consistently high quality and when the public is well informed about the characteristics of genuine notes. In the present circumstances, as a new series of notes is being introduced containing security features that are new to the public, and as we seek to inform the public about the new features, new-design notes put into circulation should be held to a particularly high standard of quality.

Despite an admirable history of producing, and delivering to the Federal Reserve, notes of consistently acceptable visual quality, earlier this year the Bureau of Engraving and Printing produced some $50 notes that the Federal Reserve believes fall short of the required standard of quality for notes containing new security features. Specifically, a portion of new-design $50 notes produced before September 8, 1997, have an apparent absence of ink in one or more of the concentric fine lines surrounding the portrait of President Grant. (Examples of notes with acceptable and unacceptable print quality in the fine line area are attached to this statement.) The educational information prepared for the public identifies these concentric fine lines as one of several new security features that should be present, in the form intended, in a genuine note. Consequently, we do not plan to issue those notes.

Current Production at the Bureau of Engraving and Printing
Since September 8, 1997, the Bureau of Engraving and Printing has used both improved printing plates and an improved examination system for $50 notes, with good results. Based on an inspection of notes at all of the 13 Federal Reserve offices to which new $50 notes of the type produced since September 8 had been shipped, the Federal Reserve is satisfied that those notes are suitable for circulation.

Moreover, the Bureau is producing the higher quality $50s in quantities that will enable all Federal Reserve Banks and branches to have an adequate inventory of those notes by next week. Consequently, the production of the imperfectly printed notes has not materially interfered with the planned introduction of new-design $50 notes. Nor, I might add, has it had any significant impact on the Federal Reserve's note-issuing operations.1

Disposition of the Inventory of Imperfectly Printed Notes
Disposition of the notes that the Federal Reserve considers unissuable will, of course, entail some cost. A total of 217.6 million $50 notes was produced before September 8, some portion of which appear not to be of issuable quality. Of these, 59.5 million were shipped to Federal Reserve Banks and branches, and 158.1 million are being held at the Bureau of Engraving and Printing. The unissuable notes occur more or less randomly throughout the 217 million notes.

If all 217 million notes were destroyed and replaced with additional newly printed notes, the cost to the Federal Reserve would be about $7.6 million -- roughly $360 thousand to destroy the notes now being held at the Reserve Banks and the Bureau of Engraving and Printing and to ship replacement notes to the Reserve Banks, and $7.2 million to produce replacement notes. If that were to happen, the $7.6 million cost would be reflected in a correspondingly lower payment of Federal Reserve earnings to the Treasury.

Blanket destruction and replacement may not be the only option, however. The Federal Reserve is looking into the feasibility of obtaining the equipment needed to examine these notes, one by one on our high-speed note processing machines, and to recover the notes of issuable quality. We believe that it should be possible to do that. Whether it would be feasible will depend on the costs involved and the quantity of issuable-quality notes that would be recovered. At this time, we do not have good estimates of either of those magnitudes but we hope to have them before the end of this year.

Consequently, $7.6 million should be viewed as an upper limit on the cost of this matter, with the possibility that the actual cost will be lower.

Steps to Ensure the Production of Mutually Acceptable Notes in the Future
In order to ensure that the Federal Reserve and the Bureau of Engraving and Printing not find themselves in the future in the position of having notes produced and shipped which are not of mutually acceptable quality, we have taken several important steps.

The Federal Reserve and Bureau of Engraving and Printing have jointly established print-quality standards for a new electronic examination system now being used at the Bureau to inspect all $50 and $100 notes and to review those standards regularly. This examination system promises to provide a more consistent level of printing quality calibrated more closely to the Federal Reserve's needs.

In addition, the Federal Reserve has agreed to work with the Bureau before and during production of new-design $20 notes, as well as the other lower denominations, to establish mutually acceptable quality standards and to monitor production.

These steps should help to safeguard the security and efficiency of our currency system.


1 The impact of the $50-note printing imperfections has been moderate mainly because the total volume of $50 notes in circulation is relatively low. They account for only about 5 percent of all Federal Reserve notes in circulation and only about 3 percent of Reserve Bank receipts from, and payments to, depository institutions.

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1997 Testimony