How the Fed Affects Our Physical Cash Money

The Fed adjusts interest rates and controls for inflation and deflation, but do you know how it interacts with the dollars in your wallet?

Listen to this clip to hear Alison Southwick, Morgan Housel, and Robert Brokamp talk about how the Fed backs U.S. cuurrency, which coins cost more to make than they're legally worth, $2 bills, the largest denomination of U.S. currency ever printed, and other trivia about the good old U.S. greenback over the years.

A full transcript follows the video.

This podcast was recorded on Dec. 15, 2015.

Alison Southwick: Okay, everybody. Stop what you're doing and pull out a dollar bill. What does it say on the top? Federal Reserve Note, right? Morgan, why does it say that?

Morgan Housel: Because the Fed is really the sole controller of the currency. They're backing the value of the dollar. That wasn't always the case in the past.

Robert Brokamp: If I remember correctly, don't they buy it from the Mint? The Mint creates it, then the Fed buys it.

Housel: That sounds right.

Brokamp: At like $0.05 per note, something like that.

Housel: It's good business. You and I should try that.

Brokamp: We should, that's a good one.

Southwick: Alright, so, what did it say before it said Federal Reserve Note, then?

Housel: We were talking about this the other day. Not too long ago, I got some change, and one of the dollar bills felt different. It was hard to tell, but just, the paper felt a little different, the color was a little different. At first, I thought it was probably a fake dollar. But then I looked at it, and it was a 1957 dollar. It's in remarkably good condition. And at the top of it, rather than saying Federal Reserve Note like most dollars do, it said Silver Certificate. And at the bottom, it says, "$1 in silver payable to the bearer on demand." So, back in the day, you could actually take your cash to the U.S. Treasury and exchange it for silver. That's obviously not the case anymore. That hasn't been the case since the early 90s.

Southwick: But I'd like to see you try.

Housel: You could try. But, U.S. currency used to be backed by physical commodities like gold and silver. And now, it's really just backed by the full faith and credit of the United States. So, that's why it says Federal Reserve Note rather than Silver Certificate.

Southwick: I believe in America.

Brokamp: I do too.

Housel: Here's why a dollar has value. A lot of people say, "Oh, it's just a piece of paper, it doesn't have any value, it's not backed by gold so it doesn't have any value." Here's the really big value of a dollar: if you want to do any business or work in America, you need to pay taxes. And the only thing you can pay taxes with are your dollars. And that's why dollars have a ton of value. So, when people say "It's just paper," no. It's the only currency you can use in the strongest economy in the entire world. That's why it's valuable.

Southwick: God bless America. Alright, so, we're going to test your guys' know-how knowledge about U.S. currency. These aren't too hard, you'll be OK. They're not too bad. Ready?

Housel: Yep.

Brokamp: I'm not ready.

Southwick: Alright, first question: Sacagawea has the dollar coin, but in the history of the U.S., only one woman has graced the nation's paper currency. Who was it?

Housel: It's not Susan B. Anthony.

Brokamp: I was ready to say Susan B. Anthony.

Housel: I was ready for my Susie Bs.

Brokamp: Um ... Molly Pitcher.

Southwick: Who's Molly Pitcher?

Brokamp: She used to carry water during the Revolutionary War to the Americans firing cannons.

Southwick: Oh, that's nice.

Housel: It's not Miley Cyrus?

Southwick: It's not. Close, though. Martha Washington. She's the only woman whose portrait has appeared on U.S. a currency note. It was on the face of a $1 silver certificate in 1886 and 1891, and she was on the back of the $1 silver certificate of 1896. More than you guys wanted to know. So, you guys already jumped the gun on my next question, which was, can you name another woman who's appeared on U.S. currency.

Housel: Susan B. Anthony.

Southwick: Susan B. Anthony. Can you name the third?

Housel: So, Sacajawea, Susan B. Anthony ...

Southwick: One more.

Housel: Martha Washington. You just said that.

Southwick: Another one I haven't mentioned. This one was on a coin, I assume, because Martha Washington was the only one on paper.

Brokamp: Florence Nightingale.

Southwick: No. She was not associated with the government at all, or married to anyone, or even ...

Brokamp: She was never even alive.

Southwick: She was made up.

Brokamp: Minnie Mouse.

Southwick: It's actually Helen Keller.

Brokamp: Oh, that's interesting.

Southwick: Alright. What is the largest denomination note ever printed?

Brokamp: I'm going to say $1M.

Housel: $100,000.

Southwick: $100,000, Morgan gets it.

Brokamp: Aw.

Housel: They have one at the Smithsonian Museum of American History in D.C.

Southwick: It was printed in 1934 and in '35, portraits of Woodrow Wilson on the front. The notes were never circulated to the public, and were used solely for transactions among Federal Reserve Banks. Alright. At what point in our value of coins does the coin actually become worth more than how much it costs to make it?

Housel: Quarter.

Southwick: So, it costs the Mint $0.1118 to make a nickel. Only $0.0565 to make a dime. A penny costs $0.0241. I'm going out of order. You're correct, it is the quarter and the dollar bill where they're finally worth more than what it costs to make them.

Housel: We should just round to the nearest quarter. People talk about getting rid of the penny, I say cut the dime and nickel, too.

Southwick: Let's go for it.

Housel: Quarter. Does anyone get excited about even dimes and nickels? Quarters, I feel like I can do something with. I can use these for something practical.

Southwick: I can get on board with this.

Housel: What are you going to do with a dime? Nothing.

Southwick: Quarters. Let's start this campaign, let's make this happen. Last question: as of September 30, 2015, how much U.S. currency is in circulation?

Brokamp: $1.3T.

Southwick: Bro! Did you know that?!

Brokamp: I did know this. I mean, I knew it because I read it, I don't know.

Southwick: $1.34T.

Housel: You know what I read this morning too? About two thirds of that is outside the United States.

Southwick: That was my second point I was going to make.

Housel: Maybe you read the same article this morning.

Southwick: Two thirds of U.S. currency is held outside the U.S.

Housel: When they caught Saddam Hussein, you know what he had on him? A gun and U.S. currency.

Southwick: There you go. There's a really good episode of 99% Invisible, I believe, about U.S. currency and why it's so bland-looking and plain and why it has remained so consistent throughout the years. It's very good. I recommend it.

Housel: I was trying to think the other day and I really don't remember where I got this, but I have a 1929 $5 bill at home. It's in a condition that you'd expect for something that old. But it's smaller, a bit, and the ink is bright green. But other than that, it's identical to a $5 bill today. That's almost 100 years.

Southwick: Bro, do you have any interesting money?

Brokamp: I don't, other than that $2 bill that I sent you guys the other day.

Southwick: That's what I was teeing you up to talk about!

Brokamp: The $2 bill signed by the actor who played the newsboy in the 80s classic Better Off Dead, known for the famous line, "I want my $2!" My sister ran into him in California like two years ago and got him to autograph a $2 bill for me.

Housel: I love it. A few years ago, I went to an economics conference, and for lunch tickets, they handed out actual real $50T in Zimbabwean bills. They're worth like, $0.50 or something, and it says $50T on it.

Southwick: That's cool.

Housel: That's what inflation does to you.