Michael Lambert has recently retired as Director of Banknotes for the Board of Governors of the Federal Reserve System, where he was in charge all aspects of the issuance of US currency. During his tenure, he oversaw a transformation in the management of the US dollar as a global reserve currency, managed through the rising demand during a number of international crises, and built programs to address the changing environment.
Currency News™ spoke to him about his time at the Fed, the key milestones and achievements, and what he sees coming next for the world’s most iconic currency.
Q: What was your background before joining the Fed? And how did you come to join?
A: I studied pre-med, spending my early academic life in chemistry and biology labs. But I became interested in economics towards the end of my undergraduate program. After completing my undergraduate degree, I began studying for my graduate degree in economics and completed my master’s degree in economics in 1990.
So how did I join the Fed? I was working for the Department of Defense, setting pay for non-appropriated funded civilian employees who work on military bases around the country. I travelled about 80% of my time throughout the United States and to US territories, which was a great job right out of college.
But I knew I wanted to go to graduate school, and only had the month of August to find another job before the travel picked up again, so I applied for several jobs and accepted one with the Fed, not thinking I would be there for the rest of my career. The Fed paid for my graduate degree, which was wonderful, and then 36 plus years later I retired… from the Fed.
Q: What were your roles and responsibilities within the Fed, up until and including your last position?
A: I started at the Fed in August 1984 in the field of HR compensation, which closely aligned with my pay-setting responsibilities at the Department of Defense.
But I wanted to get into economics, so after four years in HR, I accepted a position with the Division of International Finance. That job gave me a lot of exposure to economists at the Board and I completed my graduate work while in that position. In 1994, I moved into Banking Supervision and Regulation (BS&R) for a policy job, working for the Director and Deputy Director carrying out research and writing policy papers on a range of topics.
A colleague who had moved from my department in BS&R to Payment Systems wanted to build the analytical capabilities in the cash area and she contacted me about helping make that change and develop the staff. I could see fairly quickly the opportunity for a lot of change, which was right up my alley, as one of the things I am quite proud of is that I always looked for opportunities to leave a program better than I found it.
I read the Federal Reserve Act, particularly the areas pertaining to the currency program, and what struck me was the Board didn’t fully understand its role as the issuing authority. Ultimately, I became the officer over the program, and then I had the flexibility to build the program that I left when I retired. It was a challenging journey, but was truly one of the highlights of my career.
But I realised fairly quickly that I couldn’t do this alone – I needed experts to help me. And the one thing I would say to anyone starting off in leadership is, you’re not expected to know everything – you need smart people around you and to give those people credit for the work they do. And that’s how I operated – recruiting staff with the expertise I needed to make the changes I knew were necessary.
I never thought that I would be so interested in money, other than getting more of it, but I found it to be fascinating. My biochemistry background became more useful to me, such as when looking at banknote security features, and the economics of course was very helpful.
Q: When you got that job, were you then responsible for the new series that was coming through?
A: By the time I arrived, the decisions around the Series-2004 design had already been made, so I was engaged in the security development of the new family of notes. I found this work fascinating and continued to enjoy that work with industry suppliers during my career in cash.
Whilst I didn’t have any influence really over the design work at that time, and the Secretary of the Treasury continues to have final design authority, I recognized that all three agencies that have responsibilities for US currency – the Federal Reserve, the Treasury Department and its Bureau of Engraving and Printing, and the United States Secret Service – needed to play a more important role in the development of new banknote series. This recognition was never intended to take work away from the dedicated designers at the BEP, but to recognize that the three agencies needed to play a part.
Q: What was the impact of the financial crisis of 2008/09 on cash operations in the US? What lessons, if any, were learned. And are there similarities between that crisis and the current pandemic?
A: Very high demand for $100 notes was the direct impact of the global financial crises. While the Fed was often confronted with demand spikes because of crises in one part of the world or another, this was systemically high demand both internationally and domestically.
The domestic demand for $100 notes was a surprise to us and quite unusual. We saw a lot of $100s going to regions of the United States that were not known for being international distribution points, which indicated to us that there was concerns domestically about the banking situation. In addition, we did not experience a return (large flowback) after the crises, which suggests that people are more comfortable holding on to a portion of their wealth in cash.
This situation was very different from the high demand associated with Y2K, where demand spiked and then the notes flowed back very quickly afterward.
In contrast, the COVID-19 crisis resulted in very high demand for several denominations, which put considerable strain on the BEP at a time when it was also struggling with workers who contracted the COVID virus. To its credit, the BEP and the workforce pulled together and did a phenomenal job at keeping production flowing. I was very proud of the BEP and the relationship we developed over the past decade of mutual respect and recognition of roles and responsibilities. The entire BEP went above and beyond to help the Fed and the world get the notes they wanted.
"The one thing I would say to anyone starting off in leadership is, you’re not expected to know everything – you need smart people around you and to give those people credit for the work they do. "
Q: Regarding the BEP, we believe you and Larry Felix as Director of the BEP initially had some tough discussions, but the end result was a much-improved working relationship.
A: I can imagine Larry sitting here smiling knowingly! But under his and my leadership, we understood that things had to change. Back then, the BEP focused primarily on quantity of banknotes produced, rather than the quality. As technologies evolved for accepting and dispensing cash, the BEP had to evolve and understand the importance of quality banknotes.
Through a great deal of hard work and a 10-year contract to build quality processes throughout the BEP that were sustainable and accepted by the entire executive and management team, as well as the workforce, the BEP has transformed into a very different organization. The Fed and BEP established a working group of executives that meet regularly to discuss important topics that keep each organization informed about, for example, banknote development, quality and cost metrics, banknote issuance, and communication issues.
They are working so much better in a strong partnership of cooperation and collaboration, and I am so proud to know that in retirement, the BEP and the Fed are in a much better place.
One fact that we learned early on was that the BEP organization was not well informed about the role of the US dollar around the world. As a first step, Director Felix invited me to speak to executives and labor unions at the BEP to discuss the value to the world of the US dollar as a global, reserve currency. The labor unions were particularly intrigued and formed a line to ask me many questions after I completed my speech. It felt so good to know that they were interested in how the work they did affected people around the world.
In the early days, trust between the Fed and the BEP was in a very bad place. Through hard work and consistent communication, our organizations were beginning to develop that trust. Of course, in any relationship, trust needs to be nurtured, through good communication, respect, and understanding our respective roles and responsibilities.
I am proud to know in retirement that the Fed and BEP have come a long way toward trust, and I have every reason to believe both organizations value the need for trust in the future. In fact, in this pandemic, the BEP has been a phenomenal partner to the Fed during a very, very challenging period.
So, the Fed and BEP are in a very different place today, and I am confident that the good work is sustainable for the future.
Q: One major technical achievement in US currency during the last 10 years has been the increase in circulation life of the $1 bill. Why can’t other countries using cotton-based substrates achieve anything like this circulation life?
A: This topic has been a mystery to many over decades, with some organizations thinking that the Fed was reducing its quality standards to achieve longer life.
The truth of the matter is that there wasn’t really any substantive change to the design (which is protected by legislation) of the $1 bill or the construct of the $1 bill, other than some marginal changes to the sizing in the 1980s by Crane & Company, the Fed’s sole provider of US currency paper.
The reason the circulation life was only 18 months in 1990 was due to premature destruction resulting from the inability of the Fed’s fitness sensor technology to distinguish between, for example, notes that had a dog-ear versus a tear. A very large percentage of destroyed notes during that time was due to otherwise fit notes that had dog-ear corners.
As sensor technologies improved in the 1980s, the Fed’s Currency Technology Office in Richmond, Virginia, worked to implement new sensors across all of the Fed’s operational offices across the United States, which fundamentally changed how fitness was defined, without any changes to the quality standards of the notes. This one change had a remarkable change to the life of the $1 bill, and new advancements since the 1980s have made even more improvements.
Q: Staying on the subject of banknote circulation life, did you ever consider converting to polymer once Canada made the move?
A: The Fed has been actively engaged with substrate suppliers for two decades. When I first joined the group, I participated in the Currency Development Advisory Group, along with the Bank of Canada, the Bank of Mexico, and the Central Bank of Colombia, whose mission it was to support development of new substrates. At that time, the Bank of Canada had a development project (Domtar-Luminus) that was a paper-polymer hybrid, but because of one company’s desire to leave the market, the project was stopped.
The Fed, since then, has worked with polymer providers, hybrid providers, and central banks to understand whether it made sense for the Fed to invest in a new substrate. Given the very long life of US currency, and the uniqueness of our substrate, we decided to stay the course with what we had.
We have however, remained active in following the market and I, personally, spent a great deal of time with alternative providers to understand new developments and improvements to existing substrates. We certainly understood the desire of some countries to move from cotton-based substrates to polymer given the very short life of cotton substrates. And I understood the benefits accrued to those countries.
The Fed also had to consider the counterfeit situation for the US dollar. Unlike most other countries, the US had the full range of counterfeit activity, from simple digital reproductions to traditional offset, to state-sponsored, intaglio counterfeits. If we were solving for digital counterfeiting alone, we might have considered polymer or another hybrid substrate.
That said, I personally worked with a major substrate supplier to modify a long-lasting substrate at a lower cost for a lower-risk denomination. At the time I left, work was being done to assess the life of the substrate. Given the extraordinary life of US currency, and the unique feel of the substrate, there is a high bar for making important substrate changes.
Q: How successful has the new $100 been in reducing counterfeiting?
A: The new $100 note was very successful, largely because of the 3D security ribbon (MOTION), which really makes people want to look at it, but for the additional security features as well.
The traditional counterfeiters have struggled to produce a reasonable simulation of the 3D security ribbon, and the counterfeiting numbers are substantially lower. From the central bank-monitored counterfeit rate per million genuine notes in circulation perspective, the Series-2004 $100 note was a game changer. From this success, the Fed and the BEP have been working with industry suppliers and others to develop new technologies that challenge counterfeiters’ use of commonly obtained supplies to simulate the feature.
Q: Can you list the key challenges you faced? And what in your view were the three main successes during your tenure and/or the aspect(s) of your position that you enjoyed most?
A: What was quite difficult to do was building a sustainable infrastructure at the Fed to support the Board’s role as an issuing authority. We went from five people to building three different units that had responsibility for banknote development and quality, banknote issuance and reserve bank operations, and the public education program. We had to get the right skillsets, and we had to form strong partnerships because we were never going to be big enough to do it all ourselves.
In my view, building that sustainable program was one of our most important successes.
I’m also very happy to walk away knowing that our relationship with the Bureau of Engraving and Printing is very strong.
The other thing that really means a lot to me is my international relationships. While my colleagues from central banks around the world and I were not always in agreement on everything, that was fine - my job was to learn from people, and I took a lot of that information back to build what I needed to build at home.
I couldn’t have done that without having all those relationships and roles on a number of international committees, such as the Central Bank Counterfeit Deterrence Group (CBCDG), the Four Nations group, the Reproduction Research Center, participation at seminars at the ECB, the Bank of Spain, the Central Bank of the Russian Federation, to name a few.
I am indebted to my generous colleagues, and I miss those relationships very much.
Q: What has been the impact of COVID-19 on cash usage and what do you see as the long-term potential for decline resulting from the recent inability to use cash?
"Ultimately, I believe that cash will remain relevant in the post pandemic period and history has already shown us that the full elimination of cash is very difficult, even in countries where cash was deprioritised."
A: Consistent with other crises, COVID-19 brought panic, and a run to withdraw money from ATMs. In many ways, this behaviour was counterintuitive - it’s a pandemic and people were unable to spend cash because most businesses had closed. Still, people withdrew record amounts of cash from ATMs.
Financial institutions’ vault cash levels were the highest in history, so banks were holding enormous amounts of US dollars. As the public withdrew cash from ATMs, the FIs replenished them as quickly as possible and then reordered cash from the Fed. Currency in circulation increased from roughly $1.75 trillion in the months leading up to the pandemic to $2.1 trillion dollars by February 2021. The number of pieces in circulation increased to over 45 billion.
For the first time during my leadership over the US currency program, we had to think about what would happen, and what sort of choices we would have to make, if we could not meet demand. Meeting public demand for cash is a statutory requirement for the Federal Reserve, so this would have been a very major issue.
While there were some sleepless nights, we managed through the crises having made some tough choices and through a great deal of work with other government agencies, FIs, reserve banks, banking associations, CIT companies, the BEP, Crane (our paper supplier) and SICPA (our ink supplier) and many others. Keeping lines of communication open was of paramount importance and checking in twice daily with the Federal Reserve System allowed us to prioritise the multitude of challenges. Those were difficult times!
So, what will be the impact on cash as a result of the pandemic? There likely will be some long-term impact as people were encouraged in the US to use alternatives to cash and some businesses are not set up to accept cash at all. In the Washington, DC metropolitan area, many businesses were afraid to take cash, despite evidence that transmission of the virus from banknotes was very low.
Ultimately, I believe that cash will remain relevant in the post pandemic period and history has already shown us that the full elimination of cash is very difficult, even in countries where cash was deprioritised.
In the US, some states have passed legislation that makes it illegal to not accept cash because, for example, it disadvantages people who don’t have bank accounts. It will be interesting to see how this develops in the future.
Q: Touching briefly on the ‘topic-of-the-moment’, while your remit was for cash, do you see a future for a CBDC in the US?
A: Like many central banks, the Fed is studying digital currencies. At this point, I see that there are many questions that remain before there is broad adoption in the United States.
Q: You are now Co-Chair of the combined Banknote/Currency Conference. Can you comment on the event, the themes, and what participants can expect to gain?
A: I respect the fact that Currency Research has sought an innovative approach for the first conference since the start of the pandemic. While it may seem unusual to have the policy conference and the technical conference share one venue, we are working to blend the policy and technical topics so that the presentations meet the needs of everyone.
Appropriately, the pandemic has been on the minds of our colleagues for more than a year. While there have already been a number of discussions about the longer-term effects of the pandemic on cash and innovation in the face of the pandemic, I think it is important to talk about this at the conference. Having so many central banks, printers, and industry suppliers in one venue should enrich the conversation and ‘shared learnings’ is one of the objectives of this conference.
The conference will also highlight topics that cover a broad array of subjects from innovations in the cash cycle to trends in cash usage, perception studies, sustainability, developments in substrates, counterfeit deterrence, and collaborative partnerships across central banks and our industry, as well as a coin workshop and, of course, topics on Central Bank Digital Currency.
For more information and to register for the conference, please visit events.currencyresearch.com.
I think that it will be a great conference at the end of the day. I’m hopeful that we’ll be in a place where people feel safe to travel again because it is so important for us to come face to face again. I look forward to seeing everyone there and to hear about the work that is being done around the world to support our business.
Q: Is there anything you would have liked to have done at the Fed that you didn’t? And is there anything you did that you had rather, in hindsight, you didn’t?
A: No, not at all. With some remarkable colleagues, I have accomplished a great deal. While I did not complete all that I set out to do, I am confident that the United States Currency Program is much stronger today, just as my mentor had hoped when she asked me to join the team two decades ago.
One project that I spent a great deal of time on has not been completed, and I am hopeful that our work on artificial intelligence and image technologies to develop a new counterfeit analysis tool will continue to move forward.
As is true for all law enforcement agencies, competing priorities makes it difficult to focus on counterfeiting, particularly as white-collar crime is so pervasive. My goal was to automate the counterfeit analysis work, which would leave law enforcement to focus on evidentiary and investigative work. I believe this is possible and look forward to the day when I can reflect on the early beginning of this dream.
Everything I did, I did with purpose, knowledge obtained from so many of my colleagues from around the world, and dedication to serve the central bank of the United States. I am honoured to have played a part in the evolution of our programs and look forward to continued innovation and dedication of the leadership of the future.
I am very happy with how I left things. We accomplished so much, and I left the organization better than when I arrived. I am grateful to my many colleagues around the world and their generosity in sharing experiences and knowledge about our business. The friendships I made were the icing on the cake and I miss them dearly. I look forward to seeing everyone in February 2022 at the joint Banknote/Currency Conference in Washington, DC.
So, do I have any regrets? I don’t. I loved what I did, worked really hard to understand our business, learned from my colleagues, hopefully influenced the industry toward innovation, and met some wonderful people and saw some amazing places along the way.