The federal government has issued coins since its inception, but currency was originally issued by private banks that were chartered by the states. The federal government’s issuance of currency began during the Civil War. Federal Reserve notes, which constitute virtually all U.S. currency we now use, were first issued in 1914, when the nation’s central bank, the Fed, was established. Coins and federal currency other than Federal Reserve notes were distributed by the Treasury Department until 1920, when this function was transferred to the Fed. The Mint produces coins to meet public demand, and the BEP produces currency that the Fed orders. A more complete history of money and banking in the United States is discussed in appendix II. The Constitution gave Congress the power to coin money and regulate its value and prohibited states from coining money, issuing bills of credit, or making anything but gold and silver coin a tender in payment of debts. The Mint was established in 1792 and delivered coins in 1793. The Mint was originally part of the Department of State and became part of the Department of the Treasury in 1873. In 1846, the government separated its finances from commercial banks. Government monies were to be deposited in the main Treasury or in one of nine Subtreasuries—branches of the main Treasury—located throughout the United States. By 1863, when the national banking system was established, the government relied more on national banks than on the Subtreasuries, but the Subtreasuries and the main Department of the Treasury in Washington, D.C., were the only channels used to distribute coins and Treasury currency. Congress gave responsibility for designing U.S. currency to the Department of the Treasury and established the Secret Service as a Treasury bureau to guard against counterfeiting. In 1920, the Secretary of the Treasury was authorized to delegate the duties of distributing currency and coin that had been handled by the Treasury and the Subtreasuries to the Fed. The responsibilities of the Federal Reserve, as the central bank of the United States, fall into four general areas: conducting the nation’s monetary policy; supervising and regulating banking institutions; fostering the stability of the financial system; and providing certain financial services to the U.S. government and to financial institutions, including playing a major role in operating the nation’s payments system. The Fed’s operations are carried out by 12 Federal Reserve district banks that are overseen by the Board of Governors. Federal Reserve notes in circulation are recorded as liabilities of the Federal Reserve district banks that issue them, and they are the banks’ largest liabilities. Treasury securities are the largest assets of the Federal Reserve district banks. The Fed forecasts the amount of currency that will be needed to meet demand each year and submits an order to BEP for new Federal Reserve notes. On the basis of the new currency order, BEP establishes a billing rate to be paid by the Fed for the cost of manufacturing Federal Reserve notes. The Fed pays BEP the costs of developing and printing the currency. The Fed, through its district banks, distributes Federal Reserve notes to depository institutions to meet demand throughout the United States and the world. The Fed has a more limited role with coins than it does with currency. Unlike Federal Reserve notes, coins are not liabilities of the Federal Reserve banks. The Mint determines its annual coin production and monitors Fed coin inventories to identify trends in coin demand. The Fed buys coins from the Mint for face value. Upon receiving coin orders from the Fed, the Mint distributes coins to the Federal Reserve banks from its Philadelphia and Denver production facilities, and the Federal Reserve banks distribute coins to satisfy depository institutions demand. In addition to the Federal Reserve banks and their branches, the Fed also contracts with about 175 coin terminals to distribute coins to the banking system. The terminals are generally operated by armored carrier companies, which may be paid by depository institutions and retailers to wrap coins and perform other services. The primary mission of the Mint is to produce circulating coins in Philadelphia and Denver for trade and commerce. The Mint also produces and sells numismatic (collectors) coins and medals and gold and silver bullion coins and operates the government’s primary gold bullion storage facility in Fort Knox, Kentucky. BEP, which was established in 1862, operates facilities in Washington, D.C., and Ft. Worth, Texas, where it designs and prints the nation’s currency, some postage stamps, and other security documents such as military identification cards. The agencies involved in issuing and producing coins and currency are summarized in table 1. In 2002, the Mint sold about 15 billion coins with a face value of $1.4 billion that it produced at a cost of $436 million; BEP produced 7 billion notes with a face value of $103.5 billion at a cost of $384 million. The Fed spent about $30 million to process coins and $342 million to process currency in 2002. The number and dollar value of coins and currency issued for the last 5 years are shown in table 2. The penny represents more than half of the Mint’s yearly production of coins, as shown in figure 1. Figure 2 shows that BEP generally produces more $1 notes than other denominations; however, in 1999, more $20 notes were produced than $1 notes as precautionary inventory for the century date change. The Mint’s circulating coinage operations and BEP’s currency operations are financed solely by payments from the Fed. Coins and Federal Reserve notes are treated differently in the budget, reflecting the entities that issue them. The Fed has never been included in the federal budget due to judgments that fiscal and monetary policy should be kept separate. The federal budget, by definition, proposes future amounts of revenues and outlays. Because the Mint, a part of Treasury, is included in the budget, the recognition of the earnings from coins—the difference between production costs and face value, called seigniorage—is shown in the federal budget as a reduction in needed borrowing for the government, after the deficit or surplus for the year is calculated. Earnings from Federal Reserve notes are realized by the nonbudgetary Fed. The Federal Reserve district banks use receipts from the issue of Federal Reserve notes to buy Treasury securities on the open market. The securities serve as collateral for the Federal Reserve notes issued by the banks. The Fed transfers to the Treasury its interest earnings on those securities, net of its operating expenses, including payments to BEP for producing Federal Reserve notes. The transferred interest earnings are shown as a miscellaneous receipt in the federal budget under “deposit of earnings, Federal Reserve System,” and are counted in the federal budget’s annual calculation of the deficit or surplus. Production costs of both coins and Federal Reserve notes are accounted for as increases in the net cost of operations in Treasury’s consolidated financial statements. Federal accounting standards provide that seigniorage be accounted for as a source of financing in Treasury’s statement of changes in net position, whereas interest earned by the Fed for its open market operations is accounted for as revenue received on Treasury’s statement of custodial activity. Treasury has not been reporting seigniorage correctly in its consolidated financial statements but corrected its misclassification beginning in fiscal year 2003. The costs of producing coins by the Mint and currency by BEP are treated the same in the federal budget. Both the Mint and BEP have revolving funds that receive collections from the Fed. The Fed pays Treasury the full face value of coins that it buys, and Treasury then allocates the payments to the Mint. When Congress established the Mint’s Public Enterprise Fund in 1996, the Senate Appropriations Committee noted that the production of coins was driven by demand and that the variability of annual appropriations placed a burden on production operations, so the Mint was allowed to operate without annual appropriations. All Mint revenues are deposited into its Public Enterprise Fund, including receipts from the Fed from the sale of circulating coins at face value, and all expenses for making coins are paid out of the Public Enterprise Fund. However, only the revenue sufficient to cover the Mint’s costs of producing coins is included as a collection from the Fed in the federal budget, not the full face value of the coins. At least once a year, any amount that is determined by the Mint to be in excess of the amount required by the Public Enterprise Fund is to be transferred to Treasury’s general fund. The Fed pays BEP the production costs of Federal Reserve notes rather than the full face value. All BEP receipts are deposited into the Bureau of Engraving and Printing Fund and are used to pay for BEP’s operating and capital equipment costs. BEP was authorized to establish reimbursement prices from customer agencies at a level intended to cover the costs of services provided and to provide funding for the acquisition of capital equipment and future working capital. Similar to the Mint, BEP operates without annual appropriations. At the beginning of each year, BEP establishes a billing rate for currency production, based on the annual Fed currency order, past costs, expected increases, capital needs and working capital needs. Although the expected costs of Mint and BEP operations and collections from the Fed are both included in the Treasury budget submission, as a practical matter, the inclusion of the expected outlays and collections in the budget is only a notification to Congress that collections deposited in the revolving funds will be expended to produce the coins and currency in the amounts estimated. If outlays during the year are higher than what is in the budget, the Mint and BEP must notify Treasury and request an apportionment from the Office of Management and Budget (OMB), but congressional approval of the request is not necessary. An apportionment is a plan, approved by OMB, to spend resources provided by law. The profit earned from making coins, or seigniorage, is shown in the budget as a means of financing the government’s borrowings and is not counted as revenue in calculating the deficit or surplus for the annual budget.