 a natural disaster, a financial panic, $20 bills ripped to shreds, and a robot with a mind of its own. There's a connection between all of them, and they're all connected to something called the Fed. Okay, it's payday, and you get a check. You go to the bank to deposit the check, but the bank's closed, out of business. Finished. It's happened before, and it could happen again. Making sure it doesn't is one of the main jobs of the Fed, the Federal Reserve System, our nation's central bank. To start off, the most important thing anyone wants from a bank is confidence. For example, let's say I'm the bank, and these high school students trust me with their money. Good morning. How are you? Okay, how are you? I'd like to deposit $30. $30 cash into your account? Thank you. Alright, take care. Good morning. How are you? Others deposit a check. And they're confident their money will be there when they need it. They're also confident the bank will be around when they want to take out a loan. Good morning. How can I help you? I would like to take out a $2,500 loan. $2,500. You need a loan from the bank, and can I inquire what do you need the loan for? I need to buy a used car. Don't forget, banks are in business to earn a profit. So, I'll charge interest. You can see that cash doesn't play a very big part in modern banking. For instance, when you deposit a check, there's no cash involved. Your bank simply increases your account electronically. And if your bank gives you a loan, you don't receive a pile of $20 bills. The bank again adds money to your account. You can then write checks on that account. Still, cash is important for many of the things we buy, and one of the Fed's many jobs is to ensure the smooth flow of cash throughout our economy. The Federal Reserve is sometimes called the Bankers Bank, because much like you and I might have an account at the bank on Main Street, our bank has an account at the Federal Reserve Bank in its area. When our bank has more cash than it needs, it ships it to the Fed, and increases its account balance. When our bank needs cash, it withdraws from its account with the Fed. There are 12 Federal Reserve Banks around the country, plus 25 branches located in other cities, all coordinated by the Board of Governors in Washington. Every day, the Federal Reserve Banks receive truckloads of cash from local commercial banks. This truck is arriving at a Federal Reserve Bank. Inside are containers filled with nothing but cash. Once the truck is unloaded, the robots take over. They're programmed to move the containers of cash through the hallways and into the vault. From there, more robots move the cash to another area where it's counted and sorted. The coins are weighed by the bagpole, and the currency is counted by computerized machines at the rate of 80,000 bills every hour. The sorting machines reject bills that may be counterfeit to make sure the suspicious bills are inspected by an expert. The color, the feel, you'll know it's a counterfeit right off the bank. Bills that are counterfeit are sent to the Secret Service for further investigation. And as for currency that's worn out, it's shredded. Yes, every day nearly $400 million worth of cold cash is shredded into tiny pieces. Then compressed into bricks. These bricks started life as $100 bills. Now, they're trash. But most bills make it through the sorting process. They're wrapped in bundles, ready to be sent back out to banks that need currency. These operations go on every day at Federal Reserve Banks around the country. In some ways, the Fed is like many other high-tech factories. It's just that the Fed's business is money. Usually things run smoothly, but every once in a while Federal Reserve Banks are pressed into emergency action. For an example, let's go back in time. Back to 1992. It's August 1992. The B-52s release a new album called Good Stuff. In Minneapolis, the Mall of America opens for business. With 300 stores, it's the largest shopping mall in the country. Meanwhile, a major hurricane is moving directly toward South Florida. We expect that the storm is going to be in our neighborhood here by early in the day Monday. Monday, August 24th, the storm hits with full force, carrying winds that reach 160 miles an hour. Local airports are shut down. Most of the area is without power. In its wake, devastation that is nearly total. All your life's savings, right? Yeah, all my life's savings. Put everything, every money in the house. Everything. Tuesday, August 25th, almost everyone needs food and emergency supplies, but most stores are shut down. We're selling generators, chain saws, gas and oil. The only people selling things come from out of town. They won't accept checks or credit cards. So there's a huge demand for cash, and local banks are running short. That triggers emergency action by the Miami branch of the Federal Reserve. The Miami branch is part of the Federal Reserve Bank of Atlanta, which serves the southeast. Branch manager Jay Curry was at the bank soon after Andrew struck. We started calling all the financial institutions and talking with them, letting them know that we were in business and wanted to ensure them that we heard they may have a cash shortage is that we had cash available and we would do whatever possible to get that cash to them as based on their need. Local banks have an account with the Fed. They deposit their extra cash and the Fed credits their account. In normal times, the local banks ask for cash as it's needed. In this case, it's needed immediately and in great quantity. Bob Jensen is Vice President of the First National Bank of Homestead. People literally had to walk out of the lobby with somewhere between three and five thousand dollars in cash and many people needed far more than that and got more than that. If you didn't have cash, you didn't have nothing. Absolutely nothing. Butch Sullivan owns a service station in Homestead. The town was hit especially hard. There was no water, no phone service, no electricity. Just to buy ice, residents had to drive out of town and wait in long lines. Butch Sullivan needed an emergency generator. You had to pay two thousand or twenty five hundred dollars cash. No credit cards, no checks, cash. They wouldn't accept anything. Back at the Fed, Susie Fernandez and Ana Vieira were in charge of shipping cash to local banks. Tuesday, August 25th, was the busiest day on record. Ninety-nine million. Ninety-nine million was paid out that day. It was a very, very heavy day. Hectic, everything was done manually. No computers. The ninety-nine million dollars was sent out to local banks throughout South Florida including the First National Bank of Homestead. We got deliveries every day, every morning, early. We got large amounts of cash and lots of large bills and the Fed essentially gave us whatever we wanted, whatever we needed. Thursday, August 27th, South Florida is just beginning the long process of rebuilding. Hurricane Andrew has left more than three hundred thousand people without homes. It's the most expensive natural disaster in U.S. history. Many people did everything they could to help their neighbors including workers at the Fed. The Federal Reserve is like the main bank to all these banks. It's like you go to your mom for help and that's what they were doing. They were going for help and the banks were in need of cash because the people were in need of cash. So we were there for all the banks and we were there for all the people. Storing cash and providing it to banks is just one of the Fed's jobs. The vast majority of payments are made by check and the Fed is heavily involved in the complex system of check clearing. When you write a check to a person or business, whether they're across town or across the country, the check makes its way all the way back to your bank where the money is deducted from your account. Along the way, many checks are read and sorted by at least one Federal Reserve Bank, often more than one. Each day, the Federal Reserve system sorts something like 75 million checks. Then there are electronic transfers of money. Say a business in Boston owes $10 million to another company in San Francisco. Sending cash isn't very practical and mailing a check might take too long. Instead, the company can send money through the Fed's electronic network called Fedwire. The transaction is done by nothing more than electronic impulses sent across the country. $10 million is deducted from the Boston Company's bank account and instantly added to the account of the company in San Francisco. Every day, billions of dollars move across the country electronically through a vast network of computers and telephone lines. But again, the most important element in our banking system isn't cash or checks or electronic payments. It's confidence. You're confident that when you go to get cash from your bank, the bank will be there. And you're confident the cash will be accepted when you want to buy something. That wasn't always the case. In the 1800s, many banks issued their own notes, redeemable in gold or silver. But currency good in one state might not be accepted in another. And if a bank got into financial trouble, its notes might be worthless. Then there were financial disasters, like the panic of 1907, when people stormed their banks demanding their deposits in gold or silver. Finally, in 1913, Congress established the Federal Reserve System to safeguard the banking system. The Fed was to be the lender of last resort, meaning it could lend money to a bank that ran short of funds. But banks can and do fail even today. Here's how. You're two months behind and your payment's on your bank loan. Yeah. What is the problem? Well, the job I was supposed to get, well, it fell through, and I wasn't able to get it. So I don't see how I can pay the loan back right now. We need the money back in order to function as a bank. So how can we rectify this problem? Unless I can find another job or I don't know, I don't see what I can do. If enough people and businesses don't repay their loans, the bank will fail. Go bankrupt. When a bank failed in the old days, people could lose some of their life savings. So if a rumor spread that a bank was in financial trouble, it often started something called a run. Depositors would literally run to the bank, all of them demanding their money at the same time. You might have seen the movie It's a Wonderful Life. In one scene, there's a pretty accurate depiction of what a run looked like. Don't look now, but there's something funny going on over there at the bank, George. I've never really seen one, but that's got all the earmarks of being a run. Hey, Eddie, you got any money in the bank? It's better, hurry. Bank runs were actually fairly common during the Great Depression of the 1930s. Everyone wanted their money in cash, but even if the bank was healthy, the cash wasn't always there. You're thinking of this place all wrong, as if I had the money back in a safe. The money's not here. Well, your money's in Joe's house. That's right next to yours. And then the Kennedy house and Mrs. Maiklin's house and a hundred others. You're lending them the money to build, and then they're going to pay it back to you as best they can. What are you going to do, foreclose on them? I got $242 in here, and $242 isn't going to break anybody. These days, small depositors don't have to worry as much. Even if their bank fails, the deposits are insured by the federal government. So a modern run on a bank doesn't have lines of people demanding cash. It's more likely to happen electronically when large depositors use computers and telephone lines to withdraw money. Not too long ago, that's exactly what happened at one of this country's biggest banks. It's May 1984. At Disney World in Orlando, Donald Duck celebrates his 50th birthday. Meanwhile, there's widespread fear of a national banking crisis. And some economists are expressing concern that the troubles of Continental Illinois, one of the country's biggest banks, could spread to others. Continental Illinois, the eighth largest bank in the nation, is experiencing a modern-day run. The bank had lent billions of dollars to oil and drilling companies, but now oil prices are falling. The companies are going bankrupt and the loans may not be repaid. But the worry spreads far beyond Continental Illinois. Small and mid-sized banks typically keep money on deposit in a large regional bank. In this case, smaller banks throughout the Midwest have deposits at Continental. And while individual deposits up to $100,000 are insured by the federal government, larger deposits aren't insured, meaning that if Continental fails, it could trigger a wave of bank failures. Businesses with deposits at Continental are worried. They withdraw their money instantly via computers and telephone lines. It's a bank run done electronically. Thursday, May 17th, various government agencies announced they'll try to save Continental Illinois. Continental Illinois Bank is a big bank in big trouble tonight, and today it received a big chunk of money to keep it going. For the moment, all the depositors, large and small, are protected. The Federal Reserve's role is to lend money to Continental Illinois. When a bank is temporarily short of funds, it can borrow from the Fed. The bank is charged an amount of interest called the discount rate. That kind of lending takes place every day and is one of the Fed's basic functions. In this case, the Fed lends Continental billions of dollars. Meanwhile, the federal government removes the bank's management and takes control of Continental Illinois. June 1991, there's a party on the streets of Chicago. It's been seven years since Continental was taken over by the federal government. The goal was to minimize the loss of taxpayer money and eventually return the bank to the private sector. Finally, that goal was achieved. Paul Volcker was chairman of the Federal Reserve Board of Governors during the crisis. A basic Fed mandate is to protect the stability of the financial system. It's worded in a rather archaic way in the Federal Reserve Act, but there is no question that this kind of problem was precisely what the founders of the Federal Reserve had in mind in creating the Federal Reserve. Ensuring the overall safety of the banking system is one of the Fed's main responsibilities. If possible, before problems develop. That means examining banks to make sure they're financially healthy. Now, in the movies, a visit from the bank examiner is about as welcome as going to the dentist for a root canal. Good morning, sir. Carter, bank examiner. Mr. Carter, Merry Christmas. Merry Christmas. We're all excited around here. My brother just got the Congressional Medal of Honor. The President just decorated it. Yeah, well, I guess they do those things. I trust you had a good year. Good year? Ah, well, between you and me, Mr. Carter, we're broke. Yeah, very funny. In the real world, things don't quite work that way. Bank examinations are conducted by a number of government agencies, including the Federal Reserve, and not all examiners are as sour as old Mr. Carter. The team has arrived. A team of five bank examiners from the Fed. Their home base is the Federal Reserve Bank of St. Louis, which is responsible for examining state-chartered member banks in its district. On this day, they're in Jacksonville, Illinois, right in the middle of farm country. All right, a beautiful day here in Jacksonville in our great state of Illinois. We have 58 degrees. The relative humidity stands at 80 percent. The wind's out of the southwest at five. That's the latest forecast for service of 1180 radio WLDS. 19 minutes past eight. It's 819, and the team is checking the books. The company made pretty good profits for this year. $100,000 for that income. Unlike the movies, this visit is scheduled in advance, and it's done in a spirit of cooperation. Barkley Bailey is the team leader. We view our jobs somewhat as a doctor or physician. We would give the banks an annual checkup to determine that they are in good health. In this case, the patient is Elliott State Bank. It's been in business in the same location for more than 125 years. Like all banks, Elliott takes in money from its depositors, then lends the money out to other people and businesses. The bank has lent money to the local radio station, to a small college in Jacksonville, and to farmer Donnie Headon. I needed a combine, and it was going to take $20,000 in a particular time. I wasn't liquid, so I went to the bank, to Elliott Bank, and they loaned me the money. Of course, all the loans have to be paid back. Because if enough loans aren't paid back, Elliott State Bank could go out of business. So the examiners try to make sure the loans are as safe as possible. Beyond looking at numbers, that means interviewing bank management. Does the bank make many student loans? Yes, we do. We're rather heavy in student loans. We have approximately $3 million in outstanding student loans. In the end, Elliott State Bank will be graded on its overall safety and soundness. If a bank is unsound, it will be constantly monitored, perhaps even shut down. But that's the last option. We view the bank as being important to the community. We are not in the business to close banks, but to ensure that banks stay healthy and that they continue to offer the valuable service to its community. Every day around the country, there are teams of examiners visiting banks to check out their financial condition. Then there's a totally different kind of bank examination. You might say this one is a checkup of the heart. In 1977, Congress passed a bill called the Community Reinvestment Act. It encourages banks to invest money in local neighborhoods, especially in low and middle income areas. That's what the Act says on paper. It's up to the Fed and other agencies to see that it works in practice. It's March, 1982. A movie called E.T. is on its way to becoming the biggest moneymaker of all time. In college basketball, the national championship game is decided by a last-minute shot. The hero? A North Carolina freshman named Michael Jordan. Meanwhile, in Philadelphia, citizens are marching in protest against local banks. Their complaint? The banks aren't lending enough money in lower-income neighborhoods. George and Laverne Butts work for a local community group. They helped organize the demonstrations. There wasn't any way for a person who wanted to buy a home in our communities could go to a bank and say, I want to get a loan. And essentially what the banks were saying was, no. In addition to demonstrating, community groups asked for help from the Federal Reserve Bank of Philadelphia. Each of the 12 Federal Reserve Banks has a community affairs officer. In Philadelphia, it's Fred Manning. The Community Reinvestment Act establishes as public policy the duty on banks to consider low-income people just like they consider the wealthy. And our job is to work with the law to get the banks to understand the law and to work with community groups to implement the law. Fred Manning's job is to bring people together. In this case, it was protesters on one side and bankers like Craig Williams on the other. Williams is Assistant Vice President of one of Philadelphia's largest banks. Fred Manning over at the Federal Reserve has brought people to the table. He's very neutral in his approach. He's an advocate for the banks. He's an advocate for many of those who are low and moderate in income. Fred's role and the Fred's role was to encourage us to talk. It's to keep the lines of communication open. They did that well. They provided us with places to meet. In recent years, demonstrations have been replaced by cooperation. For example, each spring Laverne Butts organizes a bank fair. It's a chance for citizens to talk with local bankers. We don't want the banks to lose money and we know the banks don't want to lose money. We're not asking them to do bad loans. We're asking them to treat low and moderate income people just like to treat everybody else. That's the way they live and treat them accordingly. That's exactly what banks have been doing in Philadelphia. The result has been hundreds of millions of dollars' worth of lending for new homes. One example, this abandoned factory is being turned into housing for the elderly. Meanwhile, banks have discovered that all this lending is good for business. The banks have a new market that they previously did not tap into. They serve that market profitably and safely. The community obviously wins because you can see the community starting to come back to life. People have a lot of pride in their community once they can get access to credit. So everybody wins in it. That's the beauty of it. As we've seen, the Fed tries to make sure the overall banking system is safe and sound. That means examining banks and lending money to banks that need it. Beyond that, the Fed clears checks, distributes cash, and performs many other jobs. It's all done for a very good reason. The banking system is extremely complex and extremely important. Banks lend to individuals like you and me, whether it's for college tuition or for a new car. At the other end of the scale, banks lend millions of dollars to companies that want to invest in new plants, which leads to more jobs and a higher standard of living for all of us. And all this activity is built on the foundation of confidence. Maintaining that confidence is one of the Fed's most important roles. I'm Bobby Rivers. Thanks for watching.