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It is sent to the official banking system and burned

MoreWorn-out bills are usually removed from circulation when received by a bank. They're sent to the Treasury Department (yes, the "official banking system") for destruction. Not all of them are burned, however, due to environmental concerns. The large number of bills used in the US and the rapid rate at which $1 bills wear out has caused disposal to become a significant problem for the Treasury.
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Peyton Beahan

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