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A Different Kind of Currency Crisis

by Elaine Schwartz    •    Dec 12, 2010    •    294 Views

Our story begins with the United States announcing that it would be issuing a state-of-the-art new $100 bill. Designed to thwart counterfeiters, the new bill has 3-D interactive features. Move the bill and certain shapes and colors shift.

The bill, though, has encountered a huge glitch that delayed its production. Because it creased on the assembly line, parts were blank. Not all were defective, but no one is sure how many. With more than one billion bills being printed, a manual check could take 20 years. The goal now is to develop a mechanized check-up system. Summarizing the situation, one official said, “There is something drastically wrong here.”

A Planet Money podcast points out that anyone abroad who does not trust the local currency tends to hold US dollars. The chairman of the Fed, Ben Bernanke, said that, “We estimate that as many as two-thirds of all $100 notes circulate outside the United States.” The Fed, though, has a “missing currency” puzzle because they can approximate how much currency should be circulating but are not exactly sure of who has it.

According to the Federal Reserve, $100 bills typically have an 8.5 year life span. Who then will be affected at home and abroad if worn out bills cannot be replaced?

The Economic Lesson

A dollar bill is just a rectangle made of cotton (3/4) and linen (1/4). However, we call it money because it has three basic characteristics. 1) It is a medium of exchange. 2) It is a unit of value. 3) It provides a store of value.

Knowing that 100 U.S. dollars will consistently be worth close to 100 dollars makes U.S currency universally desirable.

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