United States General Accounting Office

GAO Testimony

Before the Subcommittee on Domestic and International

Monetary Policy, Committee on Banking and Financial

Services, House of Representatives

For Release

on Delivery

Expected at

1:00 p.m. EDT

Wednesday

October 1, 1997

U.S. CURRENCY

Printing of Flawed

Redesigned $50 Notes

Statement of Bernard L. Ungar, Director

Government Business Operations Issues

General Government Division

GAO/T-GGD-98-8

Statement 

U.S. Currency: Printing of Flawed

Redesigned $50 Notes

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to address issues you raised about the

Department of the Treasury’s recent production of flawed, newly

redesigned $50 notes. This flaw was reported in the media during the week

of September 22, 1997. As you know, the newly redesigned $50 bill is part

of a broader effort by the Treasury and the Federal Reserve to redesign the

nation’s currency to deter counterfeiting.

Today, I will address each of the specific questions you raised:

• How many flawed notes were produced?

• How did the production of flawed notes come about?

• What actions are planned about the flawed notes, and what are the costs

associated with these notes?

• Have any lessons been learned from this experience that could be applied

to the future production of redesigned currency?

To address the questions you raised, we interviewed officials and reviewed

relevant documents at the Department of the Treasury, including the

Bureau of Engraving and Printing (BEP), which designs and produces the

nation’s currency; the Secret Service, which conducts investigations of

counterfeiting activities; and the Federal Reserve, which distributes U. S.

currency and ensures its physical integrity. We also performed a limited

inspection of the newly designed $50 notes stored at BEP in Washington,

D.C., and at Federal Reserve banks in Philadelphia, Pennsylvania; and

Richmond, Virginia. These two banks were among 16 Federal Reserve

banks that received the flawed notes. We chose them because of their

proximity to Washington, D.C. We also interviewed officials at these two

banks. Other than the limited inspections we performed, we did not

independently verify the information provided by BEP, the Secret Service,

or the Federal Reserve. We did our work between September 26, 1997, and

October 1, 1997.

Background The introduction of significantly redesigned currency began in

March 1996, with the introduction into circulation of the newly designed

$100 note. Redesigned lower denomination notes were expected to be

introduced into circulation at subsequent 9- to 12-month intervals, but the

introduction of the $50 note has been delayed because of efforts to make

the denomination easier to read by the visually impaired. The note is now

expected to be introduced later this month.

Page 1 GAO/T-GGD-98-8
Statement 

U.S. Currency: Printing of Flawed

Redesigned $50 Notes

The redesigned currency includes several new security features. Some of

these features are overt; that is, they are designed to be recognized by the

public. The other features are covert; that is, they are intended to be used

by the banking system. One of the overt security features on the $50 note

is concentric fine lines printed in the oval shape that is behind Ulysses S.

Grant’s portrait on the front of the note. During the initial production of

the newly designed $50 notes, BEP detected flaws in some of the notes,

specifically a gap, or white space, between some of the concentric lines

surrounding Grant’s portrait.

How Many Flawed

Notes Were

Produced?

Neither BEP nor the Federal Reserve know specifically how many flawed

notes are among the 217.6 million redesigned notes produced before

September 8, 1997. Although both BEP and the Federal Reserve have done

some inspections to identify flawed notes, neither has done a complete

count or a statistically projectable sample. BEP said it is not prepared to

estimate the number of flawed notes without more thorough sampling,

which it plans to do. In Philadelphia, Federal Reserve officials looked at

200 of the $50 notes and estimated that 50 to 60 percent were flawed.

On September 30, 1997, we and Federal Reserve officials jointly reviewed

judgmentally selected samples of newly redesigned $50 notes that had

been shipped to the Philadelphia and Richmond Federal Reserve banks.

We jointly determined that 56 percent of the 1,200 notes we reviewed that

were produced before September 8, 1997, and were shipped to

Philadelphia did not meet the Federal Reserve’s standards for circulation

concerning the clarity of the concentric lines surrounding President

Grant’s portrait. At Richmond, we jointly inspected 1,000 $50 notes

produced before September 8, 1997, and found that 45 percent contained

similar flaws. We also jointly inspected 1,000 $50 notes at Richmond that

were printed after September 7, 1997, and found that 2 percent were

flawed. On September 30, 1997, we independently inspected 1,664 $50

notes at BEP headquarters that were printed after September 7, 1997, and

found that 12 percent were flawed. A better estimate of the number of

flawed notes at BEP and the Federal Reserve banks cannot be made until

more rigorous and scientific sampling procedures are used for the note

inspections.

How Did the

Production of Flawed

Notes Come About?

BEP began producing the new $50 note in June 1997. BEP officials said they

noted problems in the initial production runs with the concentric fine lines

that form the background surrounding the portrait of Ulysses S. Grant.

Specifically, they noticed gaps in the lines, which were caused by one or

Page 2 GAO/T-GGD-98-8
Statement 

U.S. Currency: Printing of Flawed

Redesigned $50 Notes

more lines not printing completely. These gaps were inconsistently

distributed throughout the notes, thus making them difficult to correct.

BEP viewed the problem as a start-up issue to be expected with production

of a completely new note design. BEP officials told us that although they

viewed the new notes as acceptable for distribution to the Federal Reserve

and for circulation, they believed that the quality of the concentric lines

needed to be improved. Accordingly, they made a number of changes in

their production, including adjustments to printing presses, changes in the

ink, and changes to the printing plates used to create the face of the new

note. For example, BEP made modifications to the printing plates by

cutting small horizontal grooves into the concentric lines, called dams,

that permit ink to be deposited more successfully on the paper. According

to BEP, these changes reduced, but did not eliminate the concentric line

gaps in some of the $50 notes.

In September, Federal Reserve and BEP officials, at a regularly scheduled

meeting, discussed the importance of note quality. Immediately after that

meeting, BEP invited the Federal Reserve to view some of the new $50

notes that it had produced to get its customer’s input on the quality of the

notes. According to Federal Reserve officials, this was the first time they

were informed of the problems with the concentric lines surrounding

President Grant’s portrait. BEP officials said they did not tell the Federal

Reserve about the problem earlier because they believed the notes were of

acceptable quality and that the production problems were typical of those

that could be expected in producing a newly designed note.

According to Federal Reserve and BEP officials, the printing problems with

the concentric lines did not appear in test notes that BEP supplied to the

Federal Reserve prior to full scale production of the notes. BEP officials

stated that printing difficulties often appear only in the production

process. They said that test currency is produced under more carefully

controlled conditions and is not produced at the same press speeds and

volumes.

When Federal Reserve officials inspected the production notes in early

September 1997, they considered the quality of the concentric lines in

many of the notes to be unacceptable for circulation, in part because of

the public education campaign, which specifically identified the

concentric line’s clarity as a security feature that should be examined

when determining if a note was genuine. For example, educational

brochures on the note produced by Treasury and the Federal Reserve,

which are now available, advise the public to look at the very fine

Page 3 GAO/T-GGD-98-8
Statement 

U.S. Currency: Printing of Flawed

Redesigned $50 Notes

concentric lines behind the portrait to be certain that they are clear. In

mid-September, Federal Reserve officials met with BEP, U.S. Secret

Service, and other Treasury representatives who agreed with the Federal

Reserve’s concerns and also agreed on quality standards for determining

note acceptability. These standards were then programmed into BEP’s

automated currency inspection equipment.

BEP and the Federal Reserve refer to notes produced before the dams were

cut as phase I notes, and those produced after the dams were cut as phase

II notes. They refer to notes produced after BEP’s currency inspection

devices were recalibrated as phase III notes. BEP and Federal Reserve

officials believe phase II notes are of higher quality than phase I notes, and

that the quality of phase III notes is higher than that of both phase I and II

notes. Beginning in June 1997, BEP produced a total of 160 million phase I

notes, of which about 59.5 million were shipped to 16 Federal Reserve

banks and 100.5 million are stored at BEP headquarters. Beginning around

August 1, 1997, BEP produced 57.6 million phase II notes, all of which are

stored at BEP. Production of phase III notes began around September 8,

1997, and as of September 24, 1997, BEP reported having shipped about

11.7 million of the phase III notes to Federal Reserve banks and storing

about 4.3 million of the phase III $50 notes in its inventory.

Secret Service, Federal Reserve, and BEP officials said the flaws in the

notes did not increase the risk of counterfeiting or further delay the notes’

introduction. According to a Secret Service official, issuing the flawed

notes would not make them more susceptible to counterfeiting or impede

counterfeiting detection. However, the official noted that the flaw in the

concentric lines could result in increased public questions about the note’s

authenticity. Federal Reserve officials voiced similar concerns,

particularly in regard to foreign countries where U.S. currency is often

more closely scrutinized. Much of their concern stemmed from the

emphasis given to the concentric lines in the promotional material being

disseminated on the new $50 note. Federal Reserve and BEP officials stated

that the flawed notes would not cause a further delay in the issuance of

the new note to the public because the $50 note represents a relatively

small portion of BEP’s total production, and it does not take long for it to

make enough notes to meet the public demand.

Page 4 GAO/T-GGD-98-8
Statement 

U.S. Currency: Printing of Flawed

Redesigned $50 Notes

What Actions Are

Planned About the

Flawed Notes, and

What Are the Costs

Associated With

These Notes?

As of September 29, 1997, Federal Reserve officials told us that they had

not decided what to do with the flawed notes but expect to decide by the

end of the year. According to Federal Reserve officials, there is no need to

rush to make a decision because the newly designed $50 notes are not

scheduled to be released for circulation until October 27, 1997, and they

believe that they will have enough of the good notes to put into

circulation. The Federal Reserve has identified three options that it is

considering:

• destroy all 217.6 million phase I and phase II $50 notes and replace them;

• inspect the 217.6 million phase I and phase II $50 notes and destroy and

replace only those notes that are found to be flawed; or

• circulate the 217.6 million phase I and phase II $50 notes after the higher

quality new notes have been in circulation for a few years.

Before decisions can be made on which option to select, Federal Reserve

officials described several steps that they planned to take. First, they said

they would determine costs of developing and installing sensors on their

currency processing equipment to inspect the phase I and phase II $50

notes. The Federal Reserve said that although its equipment—normally

used to inspect recirculating notes—has the capability to check certain

aspects of individual notes, it does not have the sensors needed to detect

the gaps in the background of the portrait. According to BEP, its equipment

can detect the gaps in the background of the portrait but only in its normal

production format—that is, in sheets of 32 notes. Since all the phase I and

phase II notes have been cut into individual notes, BEP’s detection

equipment cannot be used for such an inspection. Thus, sensors that have

the capability to detect such gaps would need to be developed by a vendor

and then purchased by the Federal Reserve.

The second planned step would be to determine how much it would cost

to identify the acceptable notes and reprint only those that were

unacceptable. The third planned step would entail the Federal Reserve and

BEP conducting scientific samples of the entire inventory to identify what

portion is acceptable and unacceptable. Finally, the fourth step would be

to use the data obtained in the first three steps to determine the most cost

beneficial option between destroying and replacing all the notes or

identifying and destroying and replacing only the flawed notes. According

to Federal Reserve officials, they do not believe that there is a high

probability that they would choose the third option of distributing all

217.6 million phase I and phase II notes at a later time.

Page 5 GAO/T-GGD-98-8
Statement 

U.S. Currency: Printing of Flawed

Redesigned $50 Notes

The Federal Reserve has not estimated the complete costs of reproducing

the flawed $50 notes. As an example to provide perspective on the costs of

the options under consideration, according to BEP and Federal Reserve

officials, if the Federal Reserve were to decide to destroy all 217.6 million

of the $50 notes and replace them, it would cost approximately

$7.2 million for printing replacement notes plus an additional $360,000 to

destroy the notes at the Federal Reserve banks and BEP and to ship the

replacement notes. This amount is about $1 million less than the

$8.7 million the Federal Reserve initially paid for the phase I and phase II

$50 notes because the replacement production costs do not include

charges for capital equipment and fixed costs that were already included

in the charges for the original production runs.

The Federal Reserve was not able to estimate the costs associated with

option two because the costs of obtaining and installing the sensor

equipment are not known at this time; nor does it yet know what

proportion of the 217.6 million notes are acceptable or what the costs of

inspecting them would be. According to the Federal Reserve, the costs

associated with the third option would probably be minimal and would be

mostly storage costs. All costs incurred by the Federal Reserve due to the

replacement of the flawed notes would result in a reduction in the amount

of money the Federal Reserve returns to the Department of the Treasury

after it subtracts its operating expenses from its revenues.1

Have Any Lessons

Been Learned From

This Experience That

Could Be Applied to

the Future Production

of Redesigned

Currency?

Mr. Chairman, while our review of this matter has not been extensive, we

have made two observations that should prove useful in the future

production of redesigned currency. These observations relate to (1) the

Federal Reserve’s and other stakeholder involvement in inspecting BEP

production and limiting the number of notes produced until production

problems are resolved and (2) resolving the problems with printing fine

concentric lines before new denominations are produced.

The experience gained from the redesigned $50 note showed that it would

be useful to have the Federal Reserve, Secret Service, and other Treasury

officials involved early in the production process to inspect the quality of

note production. In this instance, although the Federal Reserve inspected

test notes, it did not inspect production run notes until a substantial

number of notes had been produced and shipped. According to the

Federal Reserve, it has not historically been involved in inspecting

1

For additional information on the Federal Reserve’s operations and returns of revenue to the

Treasury, see Federal Reserve System: Current and Future Challenges Require Systemwide Attention,

GAO/GGD-96-128, June 1996.

Page 6 GAO/T-GGD-98-8
Statement 

U.S. Currency: Printing of Flawed

Redesigned $50 Notes

currency production, primarily because BEP has generally produced high

quality currency; the currency designs have not significantly changed for

many years; and BEP experienced no major problems with the printing of

the newly designed $100 note last year. Federal Reserve officials said that

they are now reassessing their approach to monitoring the quality of

currency production.

Both BEP and Federal Reserve officials said that they agree that early

inspection of BEP production would be worthwhile after the experience

with the production of the newly designed $50 note, but said they have not

yet agreed on the specifics of the Federal Reserve’s early involvement.

Once BEP and the Federal Reserve reach agreement on the details, we

believe it would be helpful for them to formalize their agreement in

writing. In addition, BEP and the Federal Reserve may wish to include

Secret Service and other Treasury officials in their discussions and

agreements. Based on the problems encountered with the newly designed

$50 note, the BEP and Federal Reserve might also want to limit the

production of newly designed currency until all production problems are

resolved and to include such a limitation in their written agreement.

Our second observation deals with the resolution of problems in printing

concentric fine lines surrounding the portrait on denominations lower

than the $50 note, which the Treasury Department and the Federal

Reserve plan to introduce at 9- to 12- month intervals following the

introduction of the $50 note. According to BEP, the fine concentric line

design on the face of the new $50 note poses particularly difficult

challenges to print clearly, and the fine concentric lines will be somewhat

different for each denomination because the configuration of the portraits

will vary. For example, BEP officials said that printing the fine concentric

lines on the newly designed $100 note, which has a portrait of Benjamin

Franklin with long hair taking up a large area of the oval surrounding

Franklin’s portrait, has not been as difficult as printing the lines on the

newly designed $50 note, which has a portrait of Ulysses S. Grant with

relatively shorter hair taking up a smaller area of the surrounding oval. It

may prove helpful for BEP to explore whether design changes would lessen

the chances of production problems for future denominations.

In this regard, we noted that while BEP has improved the quality of the new

$50 notes after making production modifications to the engraved plates

and adjusting the tolerances of its inspection equipment, BEP officials

acknowledged that some imperfect notes still are produced and are likely

to continue to be produced, although at a much lower frequency. In our

Page 7 GAO/T-GGD-98-8
Statement 

U.S. Currency: Printing of Flawed

Redesigned $50 Notes

very limited observations of $50 note production this week, we observed

some imperfect concentric line backgrounds, but it is important to note

that our sampling was not statistically representative and we cannot make

any projections on the overall rate of imperfection.

Recommendations In view of the experience with the early production of the redesigned $50

note, we recommend that the Secretary of the Treasury and the Board of

Governors of the Federal Reserve:

• Formalize an agreement to have Federal Reserve, BEP, Secret Service, and

other relevant Treasury officials involved early in the currency production

process for future redesigned notes to inspect production and agree on an

acceptable level of quality;

• Limit initial production of newly designed currency to the number that

would be necessary to provide reasonable assurance that all production

problems are resolved, and include such a limitation in their written

agreement; and

• Explore the feasibility of design changes that might lessen the potential for

production problems for future redesigned denominations.

Mr. Chairman, that concludes my prepared statement and I will be happy

to answer any questions that the Subcommittee may have.

(240275) Page 8 GAO/T-GGD-98-8
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