“Prior to the Civil War there was no single national currency. Organizations such as individual banks and state legislatures circulated their own money. By 1860 there were over 10,000 different kinds of currency in the U.S. This chaotic system was an environment rife with counterfeiters but also with currency without sufficient backing.”


America’s reliance on dubious credit goes all the way back to the
country’s founding.
BY Stephen Mihm  /  August 19, 2007

The recent rumbles and ruptures in the financial markets are finally
making people reassess the dubious systems of credit that have arisen
in the past few years. In retrospect, it seems clear that honest,
tried-and-true ways of borrowing money were recklessly abandoned and
replaced by financial legerdemain: black-box transactions, synthetic
collateralized debt obligations, mezzanine tranches and credit-default
swaps — to cite just a few of the exotically named financial
instruments now facing scrutiny. America’s once-solid economy became a
house of cards, a web of debt masquerading as wealth, a system crying
out for correction. As one Wall Street banker quoted by The Financial
Times concluded, the recent credit crunch suggests that things are
finally “returning to a more ‘normal’ level after ‘abnormally’ loose
conditions over the past few years.”

But what if the last few years of playing fast and loose with credit
were not a deviation from the norm but a return to America’s economic
roots? Though it is hardly the sort of thing you read about in heroic
histories of America’s rise to economic greatness, the credit system
in the United States has often been, in effect, a confidence game writ
large, relying heavily on shaky paper promises, shell games and other
trickery. The standard account would have you believe that the road to
individual and national wealth was paved by hard-working, honest
entrepreneurs who steered clear of get-rich-quick schemes,
counterfeiters’ printing presses and suckers’ swindles. But for better
and for worse, such shady institutions lie at the heart of the
country’s moneymaking past and, if recent events are any indication,
its present.

The very phrase “making money” had a curiously literal meaning in the
years between the founding of the United States and the onset of the
Civil War. Throughout that era — a time before the federal government
issued its own, exclusive paper money — hundreds and eventually
thousands of individual banks extended credit and conducted business
by printing and circulating their own “bank notes” in denominations
and designs of their choosing. Unlike today’s currency, bank notes
were promises to pay, not cool, hard cash. A bank issuing a note vowed
to pay the stated amount in “real” money (gold or silver coin) if
someone presented it for redemption at the bank’s counter — a promise
that many banks failed to keep in times of panic. These slips of paper
became the nation’s de facto money supply, as well as the building
blocks of the country’s credit system.

None of this sat well with an earlier generation of credit skeptics.
John Adams, the former president, wrote in 1809 that “every dollar of
a bank bill that is issued beyond the quantity of silver and gold in
the vaults represents nothing and is therefore a cheat upon somebody.”
But Adams, you might argue, was missing an important point: credit is
by definition a contradictory creature. It depends on trust and
confidence and yet invites the possibility of fraud or, at the very
least, grave disappointment. In some deep, unsettling sense, credit
depends on credulousness. Or to put the matter differently, credit
depends on promises — and promises, as the saying goes, are made to be

Broken promises came in many forms in that era of bewildering bank
notes. Reputable banks often failed to meet their commitments in
moments of panic or contraction. Even when times were good, some high-
flying banks lent too many notes on the basis of too little capital
and went under. More cynically, there were so-called wildcat banks,
institutions deliberately founded in remote locations so as to
frustrate the redemption of their notes. And most cynically, a
thriving class of counterfeiters fed on the banking system. Sometimes
they copied an existing bank’s notes; other times, they took the
logical next step and, like the bankers they imitated, established
their own banks with plausible-sounding names, the notes of which they
would pass as the genuine article — which in a sense they were.

All these moneymaking operations blurred the line between what was
counterfeit and genuine. As the financial writer Hezekiah Niles
observed in 1818, there was no real difference “between a set of bank
directors, who make and issue notes . . . which they deliberately
promise to pay with a previous resolution not to pay, and a gang of
fair, open, honest counterfeiters.”

Niles was not merely being rhetorical. The erosion of the boundary
between counterfeit and genuine currency was a day-to-day reality for
everyone who handled money. There was no better symbol of this than
the ubiquitous “counterfeit detectors” found on the desks and counters
of merchants, bankers and storekeepers. These flimsy pamphlets, new
versions of which were published every week or month, claimed to list
every bank note in circulation, along with the rates of discount,
known counterfeits, rumors of fraud and instability and difficult-to-
decipher descriptions of the appearance of each and every note. When
bank notes changed hands, both parties would generally huddle over a
“detector.” After several minutes, a note might be declared genuine,
counterfeit or merely dubious, in which case a discount might be
levied. Yet often a bogus note was accepted with a knowing wink. As
one detective would later recall, “It was a popular remark among men
of business at that time, that they preferred a good counterfeit on a
solid bank to any genuine bill upon the ‘shyster’ institutions.”

For all the fraud, the system worked. Between the Revolution and the
Civil War, the nation’s economy grew by leaps and bounds. The
invidious comparisons between bankers and counterfeiters, though true,
hinted at a still-deeper truth: America’s citizens desperately needed
and wanted money to realize their ambitions, and where the reputable
banks fell short, counterfeiters and other shady moneymakers were more
than willing to take up the slack, operating along a continuum that
stretched from rock-solid banks to bona fide frauds.

The contemporary observer who best captured the uneasy coexistence of
credit and fraud was not an economist but a novelist. In his book “The
Confidence Man,” Herman Melville offered a parable of the credit
economy and the paradoxical forces that sustained it. Set aboard a
steamboat drifting down the Mississippi River, the novel recounts the
deceits and deceptions of a shape-shifting impostor who preys on the
credulity of his fellow passengers, asking for their “confidence” in
the form of loans or other acts of trust. Yet even as he defrauds his
victims, he lectures them on the importance of extending credit.
“Confidence is the indispensable basis of all sorts of business
transactions,” the protagonist says. “Without it, commerce between man
and man, as between country and country, would, like a watch, run down
and stop.” Melville’s rogue was on to something: what was creditworthy
and what was fraudulent could easily turn out to be two sides of the
same coin — or rather the same bank note.

The collapse of the distinction between legitimate and fraudulent
means of making money can end badly. It certainly did in Niles’s and
Melville’s day. Not long after Niles predicted that the nation’s
overextended banks would come to grief, a calamitous panic drove many
lenders to break their paper promises; many of them went out of
business entirely. Yet a few years later, the credit system was alive
and well, and by the middle of the 1830s an era of wild land
speculation was under way, with many more banks — and countless
counterfeiters — pumping money into the economy. Things didn’t turn
out well then either: the panic of 1837 wiped out hundreds of banks,
sinking the country into a brutal depression. Another speculative
bubble 20 years later ended on a similarly catastrophic note.

It was only during the Civil War that the relationship between the
monetary system and the credit system began to change. At that point,
the federal government entered the business of printing paper money,
issuing a forerunner to today’s greenback in order to pay for the war.
Federal legislation taxed the older system of bank notes out of
existence and left the government with the start of a monopoly over
the money supply. And so began a halting, decadeslong evolution toward
the money that we know and — at least for the moment — trust.

But credit-driven capitalism did not disappear. The spirit of
financial trickery assumed new incarnations in the succeeding century:
the stock-market manipulator, the pyramid-scheme promoter. With the
proliferation of no-doc mortgages, interest-only loans and a dizzying
array of new financial instruments, there is ample proof that America
remains in the broadest sense what Hezekiah Niles once described as “a
nation of counterfeiters.” Genuine counterfeiters no longer lurk in
every corner of the financial system, but a new crop of miscreants has
fueled the boom: fraudulent real-estate appraisers, for example, and
companies offering “credit repair” services that erase bad credit by
“borrowing” someone else’s more reputable history of paying his bills
on time. Some of these practices are illegal; others are within the
bounds of the law. The murky business of devising collateralized
mortgage obligations, whereby subprime mortgages can be born again as
new, lower-risk securities, is legal. Whether it is a good idea is
another thing altogether.

Perhaps the current wave of debt machinations will end badly. Then
again, in the long run, it may not. Consider the impressions of
another novelist, the British writer Frederick Marryat, who visited
the United States in the wake of the panic of 1837. As he surveyed the
wreckage of broken banks and worthless paper, he came to a surprising
conclusion. “If all the profits of the years of healthy credit were
added up,” he wrote, “and the balance sheet struck between that and
the loss at the explosion, the advantage gained by the credit system
would still be found to be great. The advancement of America depends
wholly upon it. It is by credit alone that she has made such rapid
strides, and it is by credit alone that she can continue to flourish.”


A century ago, that wasn’t China — it was us
By Stephen Mihm  |  August 26, 2007

If recent headlines are any indication, China’s rap sheet of
capitalist crimes is growing as fast as its economy. Having exported
poison pet food and toothpaste laced with antifreeze earlier this
year, the world’s emerging economic powerhouse has diversified into
other, equally dubious product lines: scallops coated with putrefying
bacteria, counterfeit diabetes tests, pirated Harry Potter books, and
baby bibs coated with lead, to name but a few.

Politicians are belatedly putting China on notice. Representative
Frank Wolf of Virginia delivered one of the more stinging
counterattacks last month, warning that the United States “must be
vigilant about protecting the values we hold dear” in the face of
China’s depredations.

His anger reflects the mounting disgust with how recklessly China
plies its trade, apparently without regard for the things that make
commerce not only dependable but possible: respect for intellectual
property, food and drug purity, and basic product safety. With each
tawdry revelation, China’s brand of capitalism looks increasingly
menacing and foreign to our own sensibilities.

That’s a tempting way to see things, but wrong. What’s happening
halfway around the world may be disturbing, even disgraceful, but it’s
hardly foreign. A century and a half ago, another fast-growing nation
had a reputation for sacrificing standards to its pursuit of profit,
and it was the United States.

As with China and Harry Potter, America was a hotbed of literary
piracy; like China’s poisonous pet-food makers, American factories
turned out adulterated foods and willfully mislabeled products.
Indeed, to see China today is to glimpse, in a distant mirror, the
19th-century American economy in all its corner-cutting, fraudulent
A tragic lesson (By Stephen Mihm )

China may be a very different country, but in many ways it is a
younger version of us. The sooner we understand this, the sooner we
can realize that China’s fast and loose brand of commerce is not an
expression of national character, much less a conspiracy to poison us
and our pets, but a phase in the country’s development. Call it
adolescent capitalism, if you will: bursting with energy, exuberant,
dynamic. Like any teenager, China’s behavior is also maddening,
irresponsible, and dangerous. But it is a phase, and understanding it
that way gives us some much-needed perspective, as well as some tools
for handling the problem. Indeed, if we want to understand how to deal
with China, we could do worse than look to our own history as a guide.

A bit of empathy might even be in order. One hundred and fifty years
ago, even America’s closest trade partners were despairing about our
cheating ways. Charles Dickens, who visited in 1842, was, like many
Britons, stunned by the economic ambition of our nation’s inhabitants,
and appalled by what they would do for the sake of profit. When he
first stepped off the boat in Boston, he found the city’s bookstores
rife with pirated copies of his novels, along with those of his
countrymen. Dickens would later deliver lectures decrying the
practice, and wrote home in outrage: “my blood so boiled as I thought
of the monstrous injustice.”

In the United States of the early 19th century, capitalism as we know
it today was still very much in its infancy. Most people still lived
on small farms, and despite the persistent myth that America was the
land of laissez-faire, there were plenty of laws on the books aimed at
keeping tight reins on the market economy. But as commerce became more
complex, and stretched over greater distances, this patchwork system
of local and state-level regulations was gradually overwhelmed by a
new generation of wheeler-dealer entrepreneurs.

Taking a page from the British, who had pioneered many ingenious
methods of adulteration a generation or two earlier, American
manufacturers, distributors, and vendors of food began tampering with
their products en masse — bulking out supplies with cheap filler,
using dangerous additives to mask spoilage or to give foodstuffs a
more appealing color.

A committee of would-be reformers who met in Boston in 1859 launched
one of the first studies of American food purity, and their findings
make for less-than-appetizing reading: candy was found to contain
arsenic and dyed with copper chloride; conniving brewers mixed
extracts of “nux vomica,” a tree that yields strychnine, to simulate
the bitter taste of hops. Pickles contained copper sulphate, and
custard powders yielded traces of lead. Sugar was blended with plaster
of Paris, as was flour. Milk had been watered down, then bulked up
with chalk and sheep’s brains. Hundred-pound bags of coffee labeled
“Fine Old Java” turned out to consist of three-fifths dried peas, one-
fifth chicory, and only one-fifth coffee.

Though there was the occasional clumsy attempt at domestic reform by
midcentury — most famously in response to the practice of selling
“swill milk” taken from diseased cows force-fed a diet of toxic refuse
produced by liquor distilleries — little changed. And just as the
worst sufferers of adulterated food in China today are the Chinese, so
it was the Americans who suffered in the early 19th-century United
States. But when America started exporting food more broadly after the
Civil War, the practice started to catch up to us.

One of the first international scandals involved “oleo-margarine,” a
butter substitute originally made from an alchemical process involving
beef fat, cattle stomach, and for good measure, finely diced cow, hog,
and ewe udders. This “greasy counterfeit,” as one critic called it,
was shipped to Europe as genuine butter, leading to a precipitous
decline in butter exports by the mid-1880s. (Wily entrepreneurs,
recognizing an opportunity, bought up genuine butter in Boston,
affixed counterfeit labels of British butter manufacturers, and
shipped them to England.) The same decade saw a similar, though less
unsettling problem as British authorities discovered that lard
imported from the United States was often adulterated with cottonseed

Even worse was the meatpacking industry, whose practices prompted a
trade war with several European nations. The 20th-century malfeasance
of the industry is well known today: “deviled ham” made of beef fat,
tripe, and veal byproducts; sausages made from tubercular pork; and,
if Upton Sinclair is to be believed, lard containing traces of the
occasional human victim of workplace accidents. But the international
arena was the scene of some of the first scandals, most notably in
1879, when Germany accused the United States of exporting pork
contaminated with trichinae worms and cholera. That led several
countries to boycott American pork. Similar scares over beef infected
with a lung disease intensified these trade battles.

Food, of course, was only the beginning. In the literary realm, for
most of the 19th century the United States remained an outlaw in the
world of international copyright. The nation’s publishers merrily
pirated books without permission, and without paying the authors or
original publishers a dime. When Dickens published a scathing account
of his visit, “American Notes for General Circulation,” it was,
appropriately enough, immediately pirated in the United States.

In one industry after another, 19th-century American producers churned
out counterfeit products in remarkable quantities, slapping fake
labels on locally made knockoffs of foreign ales, wines, gloves, and
thread. As one expose at the time put it: “We have ‘Paris hats’ made
in New York, ‘London Gin’ and ‘London Porter’ that never was in a
ship’s hold, ‘Superfine French paper’ made in Massachusetts.”

Counterfeiters of patent medicines were especially notorious. This was
a bit ironic, given that most of these remedies were pretty spurious
already, but that didn’t stop the practice. The most elaborate schemes
involved importing empty bottles, filling them with bogus concoctions,
and then affixing fake labels from well-respected European firms.

Americans also displayed a particular talent for counterfeiting
currency. This was a time when individual banks, not the federal
government, supplied the nation’s paper money in a bewildering variety
of so-called “bank notes.” Counterfeiters flourished to the point that
in 1862 one British writer, after counting close to 6,000 different
species of counterfeit or fraudulent bills in circulation, could
reasonably assure his readers that “in America, counterfeiting has
long been practiced on a scale which to many will appear incredible.”

What was it that made the 19th-century United States such a hotbed of
bogus goods? And why is China’s economic boom today, as New York Times
writer Howard French clucked earlier this month, “minted in

Piracy, fraud, and counterfeiting, whether of currency, commodities,
or brand-name electronics, flourishes at a particular moment in a
capitalist society: the regulatory interregnum that emerges in the
wake of fast-paced capitalist change. This period is one in which
technology has improved, often dramatically, and markets have burst
their older boundaries. Yet the country still relies on obsolete ways
of controlling commerce. Until there’s something to replace them,
counterfeiters and other flim-flam operators flourish, pushing new
means of making money to their logical, if unethical, conclusion.

Indeed, the ease with which counterfeiters and corner-cutters operate
in China today can be attributed to many of the same failings that
plagued the United States 150 years ago: a weak, outdated regulatory
regime ill-suited to handling the complexities of modern commerce;
limited incentives for the state to police and eliminate fraud; and,
perhaps most important of all, a blurring of the lines between
legitimate and fraudulent means of making money.

All of these are typical of capitalism in its early, exuberant phase
of development. The United States may have been the worst offender,
but early industrial Britain had significant problems with food
adulteration and counterfeiting, and Russia from the 1990s onward has
been the scene of some of the worst capitalist excesses in recent
memory. And in all likelihood China’s recklessness is just that: a
phase that will eventually pass when the nation’s regulatory
institutions catch up with its economic ambition.

None of this is to suggest that we should exonerate China for shipping
poisonous pet food and lead-impregnated toys, nor that we can count on
China merely to follow in our footsteps. There are, obviously,
enormous differences between modern China and the United States of 150
years ago. China is not a democracy; however angry its citizens may
be, they have limited capacity to translate their rage into
legislation aimed at putting the brakes on the economic free-for-all.
And there’s no equivalent of the muckraking American journalists who
thrust these issues into the public spotlight. Just as bad, many of
the worst excesses are being conducted under the auspices of the

But understanding the parallels does suggest a way to move forward.
The rogue industries of the United States eventually responded to
stiff international economic pressure. Beginning in the 1880s, the
European meat boycotts spurred Congress to pass a raft of federal
legislation aimed at imposing some inspection controls on the exports
of meat. In response, European countries opened their doors to
American meat again. And in 1891, Congress finally bowed to decades of
angry lobbying and passed an international copyright law that
protected foreign authors.

At a certain point, some of the push for change can come from within.
As a capitalist system evolves, there can come a time when some
players in the economy prefer to be held to more stringent standards,
even ones that impose additional costs.

Partly, this happens when a country begins producing and exporting
original goods that might appeal to counterfeiters elsewhere. The
United States, for instance, strengthened its copyright laws to
protect the growing number of American authors whose books sold
overseas. If the Chinese movie business gains a significant
international audience, it’s safe to say that Hollywood will get a
better reception next time it complains about knockoff DVDs of the
latest Bruce Willis flick.

In the scandal-racked American food business, several industry leaders
converted to the cause of regulation in no small part because there
was money to be made: Certain competitors would be put at a
disadvantage, and the new federal laws would banish the inefficiencies
of the older patchwork of state-level regulation.

But at a more fundamental level, producers began to realize that they
could reap big profits from simple trust. By 1905, business leaders
were testifying in Congress that the federal government could “do much
toward preserving the reputation of US foods abroad” — in other
words, they could make more money if potential trading partners
believed the United States was finally cleaning up its act. And that’s
exactly what happened with the passage of the landmark Food and Drug
Act the following year.

With each regulatory advance, the United States began gaining the
trust of its own consumers, along with the rest of the world. In the
process it went from being an upstart to the most powerful economy on
the globe. China is far more than an upstart already, but as recent
events suggest, it has a long way to go before it emerges, as the
United States once did, from its own reckless youth.

Indeed, if the Chinese are truly following Deng Xiaoping’s apocryphal
maxim, “to get rich is glorious,” then their own entrepreneurs and
industries may eventually recognize that to get rich while bowing to
international standards may be equally glorious — and even more

email: mihm [at] uga [dot] edu


A Criminal History of the U.S. Dollar: A Q&A on A Nation of
BY Melissa Lafsky  /  October 4, 2007

The dollar has taken serious hits recently, not only continuing to
fall against the euro but being caught even by the Canadian loonie.
From the long view, however, the dollar’s current woes are simply
another step in the long and tumultuous history of paper currency in
the U.S.

Stephen Mihm, a professor of history at the University of Georgia and
author of the new book A Nation of Counterfeiters: Capitalists, Con
Men, and the Making of the United States, has researched the rise and
development of national currency leading up to the Civil War, as well
as the counterfeiters who profited from the lax policing and confusion
that accompanied the transition to government-issued money. He kindly
agreed to answer our questions.

Q: How does the U.S. compare with other nations in its quest to create
a common paper currency?

A: Many countries at comparable stages of economic development
embraced uniform, exclusive paper currencies earlier than the U.S.
Some countries, like Norway and Denmark, completed the process by the
1820s; others, like Britain and France, made decisive moves towards a
paper currency in the 1840s.

The U.S., by contrast, resisted moves in this direction until the
1860s. Prior to that time, hundreds and eventually thousands of
private banks, each chartered by the individual states, printed their
own money; over 10,000 different kinds of notes floated in circulation
by 1860, in a bewildering variety of denominations and designs.
Everything from three-dollar, four-dollar, and seven-dollar bills were
in circulation, and notes depicted everything (and everyone) from
Greek gods to Santa Claus to obscure politicos.

By contrast, the federal government didn’t print paper money, and
didn’t even contribute many coins to the “hard money” supply (most of
the coins in circulation came from the mints of foreign governments,
especially those of the former Spanish colonies). If you could go back
in time and look in the cash register of a corner store, for example,
you would find a motley assortment of bills and coins. Little wonder
that by the 1830s, storekeepers were subscribing to things called
“counterfeit detectors” and “bank note reporters” — thick pamphlets
that gave descriptions of all the different notes in circulation,
along with their presumed valuation and known counterfeits. People
exchanging money would turn to these booklets whenever a bill changed
hands, poring over it to identify what, exactly, they were accepting
as money.

Q: Prior to the general acceptance of paper money, coins made up the
majority of hard currency in the colonies and in Britain. Why the
switch to paper? Did this change make counterfeiters’ jobs
significantly easier?

A: In the colonial era, Americans had a problem: though the country
was home to budding capitalists, it had very little in the way of
capital, which in that era meant one thing — gold and silver coin.
Thanks to trade imbalances, most coins in the colonies ended up
flowing back to Britain. This loss left entrepreneurs struggling, as
it did the colonial governments, which had their own bills to pay.

The solution? Have the individual colonial governments issue paper
notes that claimed to be “equal in money,” meaning equal to coin.
Never mind that there weren’t enough coins in the colonial coffers to
back up these bills. Beginning with Massachusetts in 1690, the
colonists pioneered the first government-issued paper money to appear
in the Western world.

The result was a boon to capitalists in need of a means of exchange,
but it also marked the beginning of a home-grown counterfeiting
industry. Though many of these early bills were marked “‘Tis Death to
Counterfeit,” convicted counterfeiters generally avoided the gallows,
for the simple reason that the demand for money — real or counterfeit
— outstripped the supply, and many juries saw counterfeiters as
performing a public service. Convictions were rare, and harsh
punishments even rarer.

Q: What were other factors before the Civil War that allowed
counterfeiting to flourish in the U.S.?

A: Counterfeiting continued to be tolerated to a remarkable degree
after the founding of the country. Part of the issue was the fact that
most of the paper money in circulation came from private banks, not
public governments. Counterfeiting was thus a crime aimed at a
corporation, not the state. That meant that punishment was even less
of a deterrent: a few years in prison, tops.

Given that many of the banks issuing paper money were viewed as “legal
counterfeiters” by people critical of unsavory banking practices
(subprime lending is just the latest chapter in this country’s
reliance on shaky credit), juries weren’t too willing to send someone
to prison for imitating the notes of a bank whose own right to issue
notes was far from accepted.

All of this together meant a corruption of commercial ethics.
Businessmen had a saying before the Civil War, which more or less went
as follows: “Better a good counterfeit on a solid bank than a genuine
note on a shaky bank.” What was genuine and what was counterfeit
mattered less at this time than whether or not a note could be palmed
off on someone else. Needless to say, this made prosecuting
counterfeiters a difficult affair.

It also didn’t help that policing was a corrupt, understaffed, and
sorry affair during this time. Counterfeiters corresponded with one
another across state and even national lines; the cops, by contrast,
hardly knew what was going on in their own backyard, much less in a
neighboring city or state. Extradition was almost nonexistent, so when
a counterfeiter was arrested, he or she simply posted bail and fled to
a more hospitable locale — and began doing business once again.

Q: Did the explosion of counterfeiting in the late 1800s hinder
economic growth? Why or why not?

A: Not at all. If anything, counterfeiting contributed to economic
growth, pumping much-needed (or much-wanted) credit into the economy,
and helping to fuel the era’s breakneck economic growth. Such was
especially the case in newly-settled regions of the country, where the
demand for a medium of exchange was so great that people handling
money were willing to overlook the fact that much of the paper in
circulation was bogus.

That said, it’s worth noting that counterfeiters were just the
beginning: there were plenty of other dubious entities at this time,
all printing money that wasn’t, strictly speaking, counterfeit. A
favorite tactic of counterfeiters, for example, was to create a note
on a bank that didn’t exist, but sounded plausible: the Metropolitan
Bank of New York, for example. Sounds good, right? But it didn’t
exist. Still, they would print off notes and put them into circulation
as if the bank was legitimate.

Q: How did the Civil War affect the national currency? Did the war
have any affect on the practice of counterfeiting? What about the
public perception of it?

A: Everyone knows that the Civil War destroyed slavery. Less well
known is the fact that it abolished the system of private currency
creation that had served the country since its founding.

When the South seceded from the Union, the North faced a serious
funding crisis. Eventually, Lincoln’s administration reached for one
of the only options available to them: the printing press. They issued
paper money backed by the federal government (though the notes weren’t
redeemable in “real money” for several years). These notes were the
greenbacks, and for the first time, the nation had a uniform common
currency. In time, economic nationalists passed legislation taxing the
old system of private bank notes out of existence.

But the raft of legislation passed during the war gave the old banks
an option: they could trade in their state charters for new, federal
charters so long as they bought some treasury bonds (thus helping to
pay for the war). In exchange, they got the right to issue notes.

These weren’t like the old notes, where banks got to choose the
designs. Now, the federal government dictated the design; the only
thing that differed in a given denomination of these new “national
bank notes” was the name of the bank; everything else was standardized
and chosen by the Treasury Department. All this new money was national
in appearance: national heroes like the founding fathers were now in

This surge of nationalism meant a change in the climate of
counterfeiting. What had formerly been a crime against often
disreputable financiers was now a crime against the federal
government. Anyone foolish enough to knock off imitations of the new
currency now faced long jail terms and heavy fines.

Would-be counterfeiters also faced a new, national police force that
had emerged during the Civil War: the Secret Service. Long before it
was charged with protecting the president, the Secret Service was
created to protect the new national currencies. Founded by a corrupt
but cunning former bodyguard, prison warden, and shadowy figure named
William Wood, the Secret Service grew into a well-respected,
professional police force within a decade of its founding. And it
proved remarkably successful: by the end of the century,
counterfeiting ceased to be prevalent in the U.S.

Q: Tell us about some of the unintended consequences of striving for a
single national currency.

A: Once the country began moving down the path of a common national
currency, people started looking at money differently. Money became a
means of cementing people’s allegiance to the United States: by
handling it, you were tacitly putting faith in the fiscal rectitude of
the nation.

At the same time, there’s a kind of blind trust that affects how we
handle the currency in our wallets nowadays. Our money is so safe (for
the most part) that we don’t even inspect it, save for the rare
occasion when we get a high-denomination bill. Unlike people before
the Civil War, who often spent several minutes inspecting every bill
they received, we don’t look at our money. In fact, I suspect that
many Americans can’t even remember the bills on which, say, Hamilton,
Lincoln, Jackson, Grant, or Franklin appear, much less what shows up
on the back of those bills. We trust our money so much now that we’re
practically blind to it.

Q: How and why did New York become the center of capitalism?

A: Until the 1830s, it was Chestnut Street, Philadelphia, that was the
nation’s financial center, not Wall Street. Everything changed during
that decade: New York City, which was already booming thanks to the
opening of the Erie Canal, was the chief beneficiary of a bizarre but
nonetheless cataclysmic political struggle called the Bank War.

Though the federal government didn’t issue paper currency at this
time, it had chartered something called the Bank of the United States,
which was a forerunner of modern central banks. Based in Philadelphia,
it issued bank notes; it also regulated all of those smaller state-
chartered banks, making sure that they didn’t extent too much credit.

In the 1830s, then-President Andrew Jackson decided to destroy the
bank, vetoing attempts to recharter it for another twenty years. Why
he and his political followers did so is something that historians
still argue about. Some of his supporters, though, were New York
bankers who had lots to gain if the field was cleared of the Bank of
the United States. They lent crucial support to the veto, and when
Jackson triumphed, the nation’s financial center moved north to Wall

Q: Tell us about the state of counterfeiting today. How has it
evolved? Are counterfeiters neck-and-neck with new technology? Or have
technological advances essentially made it a pointless crime, since
perpetrators are sure to be caught?

A: Counterfeiting fell into near-insignificance until the 1990s, when
a new crop of digital technologies — color photocopiers and programs
like Photoshop — suddenly made the greenback an easy mark for
homegrown forgers. The Treasury responded by launching a series of new
bills which are filled with anti-counterfeiting devices.

These new bills have had the effect of frustrating most
counterfeiters, save for more sophisticated rings. The most infamous
of these — if the evidence is to be believed — is the government of
North Korea, which until recently was alleged to have been producing
high-quality imitations of fifty and hundred dollar bills. These
“supernotes” are partly responsible for the recent redesign of the
higher-denomination bills. Still, most counterfeiters are trailing far
behind these technological improvements. While it’s still a crime
worth pursuing in the event a criminal gang can muster the necessary
resources, it’s much more difficult than it was a century and a half

Nonetheless, the spirit of counterfeiting lives on in other forms.
People who once might have pursued counterfeiting now can make their
living by identify theft, credit card fraud, or any number of the
online con games that grow ever more sophisticated every year. We may
not be a nation of counterfeiters any longer, but the spirit of those
earlier criminal entrepreneurs is alive and well.


The campaign against counterfeits, past and present
BY Stephen Mihm  /  July 2004

Don’t look now, but the country’s money is changing. Really changing.
After decades of consistency, the greenback has begun a startling
metamorphosis in its appearance. It all began in 1996. Out went the
modest busts of the dead, replaced by enormous heads with impossibly
high foreheads and hair straight out of an advertisement for Rogaine.
The new notes made a fetish of asymmetry. The presidential portraits
sidled leftward, and strange and shiny numbers made their appearance
on the lower right-hand side of several of the high-denomination
bills, printed in a green–or is it black?–ink. And no sooner had we
come to terms with the fresh look than the Bureau of Engraving and
Printing let loose a new twenty-dollar bill that featured, of all
things, a light-blue eagle floating to the left of Andrew Jackson’s
head. A pale peach stripe now runs through the center of the bill, and
the little iridescent “20” has changed from green to gold. Even the
back of the note, which had up until then been left unchanged, was
given a sprinkle of tiny yellow “20s,” making the White House look as
though it has been encircled by a swarm of angry bees. Any user of the
once-staid United States currency would be entitled to ask: What’s
going on here?

While it is tempting to ascribe our money’s makeover to American envy
about the new Euro notes, the threat of counterfeiting was the real
impetus for the change. After some seventy years in which the look of
the greenback changed very little if at all, the country is adopting a
novel look for its currency in the hopes it will deter a new and
technologically savvy generation of criminals. But if history is any
guide, the Treasury Department has an uphill fight ahead of it;
counterfeiters have a knack for circumventing almost any obstacle put
in their way. That said, the challenges the government now faces pale
in comparison to the monetary misery of an earlier epoch, when
counterfeiting assumed epidemic proportions, eventually becoming
symbolic of a crisis of confidence in the nation’s currency, and
perhaps in its emerging economic culture as well.

It has been called the “golden age of counterfeiting” by one
historian. Between the Revolution and the Civil War, counterfeiters
operated with impunity throughout the United States. Many became folk
heroes for their exploits, and more than a few observers in the
fledging republic feared that the economy would drown in a flood of
bogus currency. Newspapers of the day published breathless warnings of
counterfeits circulating throughout the country. An issue of Niles’
Weekly Register from 1818 warned of a single fraudulent emission of
notes, telling its readers that “more, much more, perhaps, than a
million of dollars in counterfeit and altered notes, have very
recently been manufactured.” The warnings only intensified as the
decades passed, and by the early 1860s, the New York Times concluded
that “there are very few persons, if any, in the United States, who
can truthfully declare their ability to detect at a glance any
fraudulent paper money . . . In spite of all precautions,” the paper
observed, “every merchant has his pile of counterfeit money, and his
hourly fear of having it increased.”

The antebellum era’s counterfeiting problem was a consequence of the
nature of the money supply at this time. There is a tendency to assume
that the greenback is a timeless creation, that the nation-state has
always taken the lead in issuing and safeguarding the currency.
Nothing could be further from the truth. Prior to the Civil War, the
United States exercised little control over the money that circulated
within its borders, having abdicated that responsibility decades

In fact, the roots of the problem date back at least to the previous
century, when the colonists began issuing paper money contrary to the
wishes of the imperial authorities. They had good reasons: in a specie-
poor economy, it was absolutely necessary to have some circulating
medium with which one could transact business. The British passed laws
banning the practice, but to no avail. And a curious North American
tradition of monetary democracy–the right to “make money,” literally–
was born, one that reached its apotheosis during the American
Revolution, when the fledgling nation financed its independence with a
flood of paper money.

The Constitution marked an attempt to reverse this trend in that it
forbade individual states from issuing “bills of credit.” Yet at the
time, those three words had a very specific meaning: the paper debt of
governments (and occasionally individuals) issued as legal tender.
Paper money issued by state-chartered banks, or “bank notes,” did not
have the same pretensions, being nothing more than surrogates of
money, slips of paper that could, in theory, be converted to real
money (specie) when presented at the counter of the issuing bank.
Within a few years of the ratification of the Constitution, a growing
number of states had chartered banks and other corporations that could
issue their own money. The upshot was not, perhaps, what the framers
of that document had in mind when they attempted to “shut and bar the
door against paper money,” in the words of one delegate. While only a
handful of corporations issued their own notes in the 1790s,
approximately 250 did by 1815, and by 1830, the number climbed to 330.
Ten years later that number jumped again to 901, dipped in the early
1840s, and then skyrocketed again in the 1850s. By 1860, some 1,562
banks, or “rag manufactories,” as one critic called them, churned out
a dizzying stream of colorful bits of paper.

Banks, left to their own devices, did not issue their notes in
concert, nor did they subscribe to a uniform design. As a consequence,
the look of an individual bank’s notes depended on criteria as
disparate as the personal preferences of a corporation’s board of
directors, the regional or commercial allegiances of the institution,
and the relative cost of engraving the pictures, or vignettes, on the
bills. Antebellum bank notes thus portrayed a bewildering array of
individuals and events drawn from history, mythology, and fiction:
Lafayette, Martha Washington, Saint George and the Dragon, Poseidon,
Penn’s Treaty with the Indians, Archimedes, Santa Claus–even
contemporary figures like P. T. Barnum, Lord Byron, Jenny Lind, Daniel
Webster, and yes, Andrew Jackson. Other notes depicted allegorical
figures representing commerce and industry, or stock figures such as
slaves, farmers, tradesmen, and sailors. Still others showed ships,
railroads, canals, wharves, shops, and other symbols of commerce. With
every bank commissioning money of its own design (and in
denominations, sizes, and colors of its choosing) more than ten
thousand different kinds of notes bobbed up and down in the streams of
commerce by the late 1850s, continually changing hands and baffling
the uninitiated. Even the phrenologist George Coombe, no stranger to
reading appearances, marveled in 1841 that “it has become a science
nearly as extensive and difficult as Entomology or Conchology, to know
the value of the currency.”

As Coombe recognized, the simple act of reading these notes posed a
substantial challenge, one that grew more acute with every passing
year. Early on, when only a few banks issued notes, it was relatively
easy to remember the different designs, which made detecting
counterfeits–or at least poorly rendered counterfeits –a relatively
simple task. But as the decades passed, the market economy took root
in the most remote corners of the new nation. Where the market went,
banks and bank notes followed. And within the widening compass of
capitalist relations, these monetary hieroglyphs drifted ever further
from the institutions that issued them, making it increasingly
difficult to keep track of the currencies in circulation, much less
spot a fake.

It staggers the imagination to comprehend the extent and ubiquity of
counterfeiting during the antebellum years. One estimate in 1862
observed that “out of 1,300 bank note issues, but 100 are not
counterfeited,” and counted some 5,902 different kinds of bogus bills.
Others claimed that fraudulent bills accounted for upward of a tenth,
a quarter, or even a half of the paper money in circulation. Many of
these fakes went beyond simple imitations. Instead, counterfeiters
exploited people’s unfamiliarity with the currency by issuing notes
that bore no resemblance whatsoever to the genuine article (spurious
notes). Others produced notes with their title, locality, or
denomination extracted and a new one put in its place (altered or
raised notes). Still others dropped all pretense of authenticity, and
arrogated the banking function, producing notes that sounded plausible
(from the Merchants’ Bank of Utica, for instance), but which had no
parallel outside the counterfeit economy. Such notes, while deemed
counterfeit, blurred imperceptibly into yet another category of fraud,
the notes of so-called “wild-cat” banks–institutions founded by
unscrupulous financiers in remote areas for the express purpose of
making it difficult, if not impossible, for the notes to be exchanged
for gold and silver. Counterfeiting thus existed on a continuum of
fraud where the dividing line between the solid and the sham vanished
upon close examination.

While the problem of counterfeiting at this time grew out of the
diversity of the money supply (something that is no longer an issue),
there are more than a few echoes of the past in the present battle
against counterfeiting. Take, for example, the growing availability of
technologies that can be turned to the counterfeiters’ ends. In the
early nineteenth century, new engraving and printing techniques
enabled bank-note engravers to produce infinite copies of the plates
and dies used in the manufacture of notes, a process known in the bank-
note engraving trade as siderography. All the elements of a bank note–
the border, the pictures, or vignettes, and the denominations of the
bills or names of the banks–could be copied endlessly with perfect
fidelity. More than a few counterfeiters never went to the bother of
engraving imitations–they could often get copies of the real thing.
Add to that the discovery of chemicals and compounds capable of
erasing and altering notes, and perhaps most important of all, the
invention of photography in 1847, and the ease with which notes could
be copied, altered, and otherwise forged grew exponentially between
1800 and 1850.

And now? A similar wave of cheap and easy-to-use computer hardware and
software–color photocopiers and printers, digital scanners, and image
manipulation software such as Photoshop–has flooded the market,
enabling anyone with a bit of computer expertise and a criminal
mindset to make their own money. Like the technological innovations of
the past century, this equipment does not require extensive training
to use, and is cheap and widely available for use at home, schools,
printers’ shops, and a host of other venues.

The government’s response has been swift, if predictable. Seeing the
writing on the wall–and fearing the printing in the wallet–the
Treasury Department funded a National Research Council study in 1993
to investigate possible counterfeiting deterrents. The research team
put safety features through countless tests, probing for weaknesses,
trying to find ways to outwit the latest technology. The ongoing
makeover of our money is a product of that first study, and will add
about two cents to the cost of producing each note, a cost, the Bureau
of Engraving and Printing assures us, that is to be defrayed by
interest on government bonds held by the Federal Reserve. Fear not,

While the new designs may seem exotic and strange, there is nothing
particularly new about any of them. The use of special inks,
complicated watermarks, complex designs, and denomination-specific
safeguards (such as printing “20” dozens of times on a bill) has a
long and illustrious history. In the early republic, bank-note
engravers and mechanics filed scores of patents designed to frustrate
counterfeiters using precisely these devices. Want some
anticounterfeiting paper? A proposal from 1822 that calls for the use
of paper dyed with blue indigo might be of help. Or would special inks
be of interest? Any of the different two-toned black and green inks
developed in the 1850s would be of use. Watermarks? They went into
widespread use in the early nineteenth century, with the manufacturers
of bank note paper taking the lead. All of these anticounterfeiting
measures have a history, and a rather long one at that. And in the
past, counterfeiters have always managed to circumvent these
obstacles. Indeed, they have an incentive to do so. The most dangerous
counterfeit–and the one that is most likely to pass without much
trouble–is one that perfectly imitates some safeguard the public
believes to be inimitable.

It does not bode well for the Treasury Department. Yet one thing our
government has going for it is that it need only protect a limited
number of designs. Indeed, the strength of today’s money supply lies
not with its diversity, but with its simplicity. With only six
different types of bills in circulation, it is relatively easy to
remember what face goes with what denomination, though more than a few
people will struggle to remember when posed that question. Their
amnesia is less a function a cultural illiteracy (or poverty) than a
testament to just how secure they feel about the currency and how
little they need to question the underlying value of these scraps of
paper. We do not much read money any more. The bill is in our hands,
it is green, and it has a number on it: that is all we need to know.
Its virtue is its familiarity. Which is why the government has
introduced the new anticounterfeiting measures over the space of close
to decade, and in a series of very slow, staged steps. “The currency
still has a familiar American look,” states the Bureau of Engraving
and Printing on its Website. “The size of the notes, basic colors,
historical figures and national symbols are not changing,” the Bureau
notes reassuringly. “New features were evaluated for their
compatibility with the traditional design of U.S. currency.”

That is debatable, given how they have tarted up Andrew Jackson. But
the intent is clear: do not make radical changes or you risk shaking
people’s faith in the paper in their wallets. The greenback has become
so synonymous with the financial strength of the United States both at
home and abroad that radically altering the design is dangerous. Such
changes are only welcome when a nation wants a new start (Iraq, for
example), or in the case of the European Union, when an entire region
wants to carve out a new identity. But in general, preventing a few
counterfeits is not worth the erosion of confidence that accompanies
the wholesale revision of the symbols and signs that give our money
its meaning. After all, in the absence of a gold standard, it is all
based on confidence.

By contrast, the banks that issued notes prior to the Civil War
worried little about what a change in the design of their notes would
mean. If anything, a more expensive and artfully engraved note was
taken to be symptomatic of the bank’s financial well being, while a
poorly engraved or simple note could indicate a lack of resources and
commitment. Individual banks and other note-issuing corporations did
not have to shoulder the burden of national sovereignty; they had only
to worry about their own interests and their own profit.

Despite all the counterfeiting, that system worked relatively well:
the nation had a sufficient circulating medium to meets its insatiable
need for credit. And while the system collapsed with some regularity–
in 1818 and 1837 most dramatically–resulting in the suspension of
specie payments if not national bankruptcy, it does not appear to have
slowed down the pace of growth. Indeed, if anything, the sprawling
system of state-chartered banks and the money they issued contributed
to the nation’s economic ascent. The federal government played little
role in any of this in the early nineteenth century, minting some
coins and chartering the Bank of the United States, but otherwise
steering clear of direct involvement in the monetary system. That
process of disengagement only intensified after Jackson’s “Bank War”
in 1832-33, which effectively transferred control of the money supply
from the Bank of the United States to corporations chartered by the
individual states. What prevailed in the early United States was not
the most dignified monetary system, but it did work, in part because
so many people were willing to suspend disbelief and accept otherwise
worthless pieces of paper in the course of business. It was an era in
which the distinctions between the real and the counterfeit had yet to

But eventually they did coalesce, which brings us full circle back to
the efforts of the federal government to protect the currency from
counterfeiters. Short of funds during the Civil War, the North turned
to the printing presses to finance the war, issuing the money that
quickly became known as the greenbacks. Within a few short years, the
convergence of the country and the currency was complete, and the
older system of the state-chartered banks and their notes was swept
away in a flurry of nationalist legislation, replaced by a uniform
currency issued by the federal government and a select number of so-
called “national banks.” The nation-state now had a vested interest in
protecting the currency, and a new national policing agency was
established to prosecute counterfeiters to the fullest extent of the
law. Indeed, before the Secret Service began protecting the president,
its members spent most of their time protecting the money supply from
fraud, imposture, and insult. There is something telling about the
fact that the greenback was considered a national symbol more
deserving of protection than the head of state through much of the
Gilded Age. That eventually changed, but even today, the job of
protecting the money supply is central to the mission of the Secret

By the early twentieth century, the Secret Service had largely
succeeded in eradicating counterfeiting, and an era of almost
unquestioned confidence in the greenback began. Little could those
officers have imagined the present crisis of authenticity triggered by
the proliferation of digital imaging. And so now the government has
apparently come to the conclusion that a police force alone cannot
protect the currency. It must harness technology as well. Today, as in
the early republic, there is the hope that a splash of color, some
watermarks, and a new look will frustrate the counterfeiting
community. Perhaps, but as the bankers of the early republic could
attest, it is one thing to make money more difficult to copy; it is
altogether another matter to make it impossible to imitate.

Further Reading:

There is no serious history of counterfeiting in the United States,
though Lynn Glaser, Counterfeiting in America: The History of an
American Way to Wealth (New York, 1968) is not without its merits.
Also helpful, if a bit earlier in focus, is Kenneth Scott,
Counterfeiting in Colonial America (New York, 1957). On counterfeiting
and the rise of the Secret Service, see David R. Johnson, Illegal
Tender: Counterfeiting and the Secret Service in Nineteenth-Century
America (Washington, D.C., 1995). For more on the rise of national
monetary systems, consult Eric Helleiner, The Making of National
Money: Territorial Currencies in Historical Perspective (Ithaca,


BY Stephen Mihm  /  July 23, 2006

On Oct. 2, 2004, the container ship Ever Unique, sailing under
a Panamanian flag from Yantai, China, berthed in the Port of Newark.
As cranes unloaded the vessels shipping containers, which were filled
with a variety of commercial goods, dockworkers singled out a
container and placed it aboard a flatbed truck, which was driven to a
warehouse a few miles away. There, F.B.I. and Secret Service agents,
acting as part of a sting operation, gathered around the container and
cracked it open. Beneath cardboard boxes containing plastic toys, they
found counterfeit $100 bills worth more than $300,000, secreted in
false-bottomed compartments.

The counterfeits were nearly flawless. They featured the same
high-tech color-shifting ink as genuine American bills and were
printed on paper with the same precise composition of fibers. The
engraved images were, if anything, finer than those produced by the
United States Bureau of Engraving and Printing. Only when subjected to
sophisticated forensic analysis could the bills be confirmed as

Counterfeits of this superior sort known as supernotes had
been detected by law-enforcement officials before, elsewhere in the
world, but the Newark shipment marked their first known appearance in
the United States, at least in such large quantities. Federal agents
soon seized more shipments. Three million dollars worth arrived on
another ship in Newark two months later; and supernotes began showing
up on the West Coast too, starting with a shipment of $700,000 that
arrived by boat in Long Beach, Calif., in May 2005, sealed in plastic
packages and wrapped mummy-style in bolts of cloth.

In the weeks and months that followed, federal investigators
rounded up a handful of counterfeiting suspects in a series of
operations code-named Royal Charm and Smoking Dragon. This past
August, in the wake of the arrests, Justice Department officials
unsealed indictments in New Jersey and California that revealed that
the counterfeits were purchased and then seized as part of an
operation that ensnared several individuals accused of being smugglers
and arms traffickers, some of whom were suspected of having
connections to international crime rings based in Southeast Asia.

The arrests also prompted a more momentous accusation. After
the indictments were released, U.S. government and law-enforcement
officials began to say in public something that they had long said in
private: the counterfeits were being manufactured not by small-time
crooks or even sophisticated criminal cartels but by the government of
North Korea. The North Koreans have denied that they are engaged in
the distribution and manufacture of counterfeits, but the evidence is
overwhelming that they are, Daniel Glaser, deputy assistant secretary
for terrorist financing and financial crimes in the Treasury
Department, told me recently. Theres no question of North Koreas

Last September, the Treasury Department took action to signal
its displeasure. The department announced that it was designating
Banco Delta Asia, a bank in Macao with close ties to North Korea, a
primary money-laundering concern, a declaration that ultimately led to
the shutting down of the bank and the freezing of several key overseas
accounts belonging to members of North Koreas ruling elite. In a
public statement, Treasury officials accused Banco Delta Asia of
facilitating North Koreas illicit activities by, among other things,
accepting large deposits of cash from North Korea, including
counterfeit U.S. currency, and agreeing to place that currency into

The counterfeiting of American currency by North Korea might
seem, to some, to be a minor provocation by that countrys standards.
North Korea, after all, has exported missile technology in blatant
disregard of international norms; engaged in a decades-long campaign
of kidnapping citizens of other countries; abandoned pledges not to
pursue nuclear weapons; and most recently, on July 4, launched
ballistic missiles in defiance of warnings from several countries,
including the United States.

But several current and former Bush administration officials
whom I spoke with several months ago maintain that the counterfeiting
is in important ways a comparable outrage. Michael Green, a former
point man for Asia on the National Security Council, told me that in
the past, counterfeiting has been seen as an act of war. A current
senior administration official, who was granted anonymity because of
the sensitivity of relations between the United States and North
Korea, agreed that the counterfeiting could be construed by some as a
hostile act against another nation under international law and added
that the counterfeits, by creating mistrust in the American currency,
posed a threat to the American people.

Whether counterfeiting constitutes an economic threat, the
issue of North Korean counterfeiting is aggravating diplomatic
relations between the two countries. According to some analysts, the
freezing of North Koreas bank accounts helps explain the regimes
decision to launch its missiles on July 4. Bill Richardson, the
governor of New Mexico and a former U.S. ambassador to the United
Nations, visited North Korea last fall, not long after the Treasury
Departments crackdown. When I spoke with him in mid-July, he said that
the missile launch was in part a protest of the departments actions.
When I was in Pyongyang in October, he said, my interlocutor raised
the counterfeiting issue and the freezing of the assets as a major
irritant for the government. He continued, The counterfeiting issue,
and the crackdown on Banco Delta Asia, is a major factor which is
contributing to Kim Jong Ils posturing.

How much of a concern should the counterfeiting be? Is it
worth adding the issue to an already volatile diplomatic situation?
The current South Korean government, which has made d nte with North
Korea a centerpiece of its foreign policy, has shied away from an open
confrontation with the regime over the issue. Even many American law-
enforcement officials who are upset that North Korea is counterfeiting
nonetheless question the view that the counterfeiting poses an urgent
threat. In Congressional testimony delivered in April, Michael
Merritt, deputy assistant director of investigations for the Secret
Service, which is responsible for protecting the nations currency from
counterfeiters, said that the supernote was unlikely to adversely
impact the U.S. economy based on the comparatively low volume of notes

The Bush administration, though, is taking a hard line. In
response to a question after a speech in Philadelphia in December,
President Bush himself suggested that counterfeiting is among the
regimes gravest affronts. North Koreas a country that has declared
boldly they’ve got nuclear weapons, he said. They counterfeit our
money. And theyre starving their people to death.

Funny Money

In December 1989, while counting a stack of $100 bills, an
experienced money handler in the Central Bank of the Philippines
became suspicious about one bill in particular. It passed the usual
tests for authenticity but still felt a bit odd. The bill eventually
found its way to the offices of the United States Secret Service. All
counterfeits sent to the Secret Service headquarters, in Washington,
are examined under a microscope, scrutinized in ultraviolet light and
otherwise dissected to reveal their flaws and shortcomings, as well as
the printing techniques used in their manufacture. This information is
then cross-checked with a database of all known counterfeits.

As the mystery note underwent the usual scrutiny, it became
apparent that this was no ordinary counterfeit. For starters, it was
printed on paper made with the appropriate mix of three-quarters
cotton and one-quarter linen of real U.S. currency. Making secure
paper with this mix requires a special paper-making machine rarely
seen outside the United States.

In addition, the note was manufactured using an intaglio
press, the most advanced form of currency-printing technology
available. These intaglio presses are far more expensive than ordinary
offset, typographic or lithographic presses, which yield inferior
counterfeits. An intaglio press coats the printing plates with ink,
and then wipes the surface clean, leaving behind ink in the recesses
of the engraving. The press then brings paper and plate together under
pressure, so that the ink is forced out of the recessed lines and
deposited on the paper in relief. While counterfeits made using the
intaglio process had been seen on rare occasions before, this note
surpassed all of them in the quality of the engraving.

As with other new species of counterfeits arriving in the
offices of the Secret Service, the bill was given its own flat-file
drawer and christened with a sequential number: C-14342. In time, its
remarkable quality earned it its more informal honorific: the
supernote. But as soon became clear, the supernote was merely one
member of a family of counterfeit notes. Technicians at the Secret
Service soon linked it to another intaglio note detected around the
same time, C-14403. This counterfeit had a few defects that the note
from the Philippines did not, suggesting it was manufactured before
C-14342. Nonetheless, C-14342 was soon known by the name Parent Note
14342, or PN-14342.

The Secret Service has drawn up what looks like a genealogical
chart of these and related bills, which agents showed me during a
visit to their Washington offices this spring. The chart displays the
many members of the supernote clan: C-21555, for example, the first
big head $100 (so-called because of the design of the most recent U.S.
bills), which was initially identified in London; and C-22500, a more
recent arrival that appeared in Macao. The family, which now has 19
members and remains unparalleled even in the world of high-quality
counterfeits, also includes two $50 notes: C-20000, a small-head
supernote that appeared in Athens, in June 1995; and C-22160, a big-
head version, first sighted in Sofia, Bulgaria.

Thanks to sophisticated tools, including mass spectroscopy and
near-infra-red analysis, along with old-fashioned visual inspection,
the labs of the Secret Service have established genetic links between
the family members. These links are not a matter of resemblance so
much as they are an indication of a common ancestry: the notes in the
PN-14342 family have been created by an individual or an organization
using the same equipment and the same materials, and most likely
operating from a single location.

As the number of supernotes multiplied, the question arose:
who created them? In theory, only governments can buy intaglio
printing presses used for making money, and only a handful of
companies sell them. Those facts alone pointed toward government
involvement, but for some time there was no consensus as to which
nation was behind the counterfeiting. Many of the supernotes surfaced
in the Middle East, notably in the Bekaa Valley of Lebanon and in
Tehran. In 1992, Bill McCollum, a Florida congressman and chairman of
the House Task Force on Terrorism and Unconventional Warfare, issued a
report accusing Iran of printing the supernotes. The report estimated
that the value of supernotes in circulation might eventually approach

The Secret Service, however, distanced itself from this
accusation. In a letter written in 1995 in response to a Government
Accounting Office report on counterfeiting overseas, the Secret
Service called the task forces allegations unsubstantiated and
characterized its conclusions as being based on rumor and innuendo. In
reality, evidence was pointing elsewhere.

A Picture Emerges

With a country as closed and secretive as North Korea,
information about government activities is hard to come by. But in the
late 1990s, a new source of information arrived in the form of
defectors. Starvation, corruption and desperation had prompted
thousands of North Koreans, many of them government officials, to flee
the country. In 1997, two high-ranking bureaucrats Hwang Jang Yop, a
former secretary of the North Korean Workers Party, and Kim Duk Hong,
head of a government trading company sought political asylum at the
South Korean Embassy in Beijing. They were the most prominent
officials to defect, but they were hardly alone: thousands of North
Koreans have fled to South Korea. Many thousands more have escaped to

In the international intelligence community, vetting accounts
from defectors about activities in North Korea soon became a specialty
as well as a necessity, for the accounts were not always reliable.
Raphael Perl, an analyst at the Congressional Research Service who has
written extensively on North Koreas counterfeiting operations, told me
that a lot of defectors or refugees give us information, but they tell
us anything we want to know. You have to question the reliability of
what they say.

Nonetheless, the most trustworthy of these accounts, when
combined with more traditional intelligence sources, permitted a best
guess of what might be happening in North Korea. And as far as
counterfeiting was concerned, the picture that emerged suggested that
moneymaking had long been a passion for the countrys dictatorial
ruler, Kim Jong Il, dating back to the 1970s, years before he took
over the reins of power from his father, the countrys founder and
first president, Kim Il Sung.

Today, on Changgwang Street in Pyongyang, the capital of North
Korea, there is a barricaded compound of government buildings. Judging
from satellite photos, these are unremarkable, rectangular structures
that suggest no special purpose. Yet according to a North Korean
specialist based in Seoul whom I spoke with recently, and who has
interviewed many high-ranking North Korean defectors, including Hwang
Jang Yop and Kim Duk Hong, these buildings are the home of Office 39,
a government bureau devoted to raising hard currency for Kim Jong Il.
(The specialist was granted anonymity because of the sensitivity of
relations between North and South Korea.)

While the operatives of Office 39 may well direct legitimate
enterprises, including the export of exotic mushrooms, ginseng and
seaweed, a substantial portion of the offices revenue comes from its
involvement in illicit activities: drug manufacturing and trafficking,
sales of missile technology, counterfeit cigarettes and counterfeit
$50 and $100 bills. According to Ken Gause, director of the Foreign
Leadership Studies Program at the CNA Corporation, a policy group in
Virginia that consults on national-security issues, the activities of
Office 39 overlap with those of two other offices that occupy
buildings in the same complex. The first, Office 38, manages the money
acquired by Office 39, he said, while the second, Office 35, handles
kidnappings, assassinations and other such activities.

All three divisions employ the same narrow coterie of elites,
and all answer directly to Kim Jong Il, who lives in a villa less than
a mile away. The history of the operations of Offices 39, 38 and 35,
Gause told me, closely follows Kim Jong Ils own rise to power through
the party apparatus. In the early 70s, after helping his father purge
the ranks of the Korean Workers Party of competing factions, Kim Jong
Il assumed control of North Koreas covert operations, mostly involving
South Korean targets.

In the mid-70s, according to defector accounts related to me
by the North Korean specialist, Kim Jong Il issued a directive to
members of the Central Committee of the Korean Workers Party
instructing that expenses for covert operations against South Korea be
paid for by producing and using counterfeit dollars. Officials in
charge of the operation supposedly brought back $1 bills from abroad,
bleached the ink and then used the blank paper to print fairly
sophisticated counterfeit $100 bills though nothing close in quality
to a supernote. Many of these notes were later used by North Korean
agents implicated in attacks on South Korean targets, like the
operatives arrested for the bombings of a South Korean government
delegation in Rangoon in 1983 and a Korean Airlines jet in 1987.

According to the same defector accounts, Kim Jong Il endorsed
counterfeiting not only as a way of paying for covert operations but
also as a means of waging economic warfare against the United States,
a way to fight America, and screw up the American economic system, as
the North Korean specialist paraphrased it to me.

In a similar vein, according to Sheena Chestnut, a specialist
on North Koreas illicit activities who has also interviewed several
key defectors, counterfeiting was seen as an expression of the guiding
idea of the regime: the concept of juche. Often loosely translated as
self-reliance or sovereignty, the idea of juche entails an aggressive
repudiation of other nations sovereignty a reaction to the many
centuries in which Korea capitulated to its larger, more powerful
neighbors. It appears that counterfeiting actually contributed to the
domestic legitimacy of the North Korean regime, Chestnut told me. It
could be justified under the juche ideology and allowed the regime to
advertise its anticapitalist, anti-American credentials.

By 1984, as North Koreas planned economy began to fall apart,
Kim Jong Il, who by that time was effectively running much of the
government, issued another directive, according to the North Korean
specialist, who told me he has obtained a copy of the document. It
explained that producing and using counterfeit U.S. dollars was a
means, in part, for overcoming economic crisis. The economic crisis
was twofold: not only the worsening conditions among the general
population but also a growing financial discontent among the regimes
elite, who had come to expect certain perquisites of power.
Counterfeiting offered the promise of raising hard currency to buy the
elite the luxury items that they had come to expect: foreign-made
cars, trips for their children, fine wine and cognac.

Laundering, Wholesaling and Redesigning

Earlier this year, I visited David Asher, a former senior
adviser for East Asian and Pacific affairs in the State Department and
an outspoken critic of the North Korean regime. In late 2001, he
explained to me, Assistant Secretary of State James Kelly asked him to
study why the North Korean regime had not collapsed, given that the
countrys economy had declined even further over the previous decade,
with industrial output alone falling by as much as three-quarters.
Former Communist countries had ended their subsidies, Kim Il Sung had
died, the country was stricken by floods and famine and the food-
distribution system had collapsed. (Party slogans betrayed more than a
hint of desperation: Lets Eat Two Meals a Day was one of the eras more
uplifting exhortations.) Yet Kim Jong Il, defying all expectations,
managed to cling to power.

How this was happening was perplexing, given the huge trade
gap, even with adjustments for aid flowing into the country, Asher
recalled. Something just didn’t add up. It didn’t account for why Kim
was driving around in brand new Mercedes-Benzes or handing out Rolexes
at parties and purchasing truly large quantities of cognac.

As Asher and his colleagues began amassing intelligence,
evidence of an array of illicit activities began surfacing everything
from ivory smuggling to the production of high-grade methamphetamine.
And counterfeiting was at the core. The more we found out about this
counterfeiting of dollars, the more we thought it was outrageous,
Asher told me. These activities provided what Asher calls an
alternative framework for existence and the palace economy of Kim Jong

In the spring of 2003, the State Department established the
Illicit Activities Initiative, an interagency effort designed to
investigate and counter North Koreas criminal activities, and
appointed Asher coordinator. The department began to systematically
collect a variety of forensic and other evidence gathered by its own
investigators, the Secret Service and elements of the intelligence
community linking North Korea to the supernotes. (Asher declined to
comment on the nature of the evidence, most of which remains

In addition, the department put together circumstantial
evidence of North Korean counterfeiting that had been accumulating for
more than a decade. In 1994, for example, authorities in Hong Kong and
Macao apprehended five North Korean diplomats and trade-mission
members carrying about $430,000 in bills that turned out to be
counterfeits of the supernote variety. Additional North Korean
diplomats, including an aide close to Kim Jong Il who was attached to
Office 39, were caught trying to launder millions of dollars worth of
supernotes over several years, prompting an increased scrutiny of
North Koreas diplomatic and trading missions.

Thwarted, the regime seems to have changed tactics, harnessing
new distribution networks and wholesaling the counterfeits to third
parties who would funnel them to criminal gangs. In the late 1990s,
for instance, British detectives began tracking Sean Garland, the
leader of the Official Irish Republican Army, a Marxist splinter group
of the I.R.A. According to an unsealed federal indictment in
Washington, Garland began working with North Korean agents earlier in
the decade, purchasing supernotes at wholesale prices before
distributing them through an elaborate criminal network with outposts
in Belarus and Russia, as well as Ireland. (Garland denies the charges
and is currently fighting extradiction to the United States from

Details of the actual manufacture of counterfeit notes also
began filtering into the State Department, much of the information
derived from defector accounts. According to similar accounts compiled
by Sheena Chestnut and the North Korean specialist in Seoul whom I
spoke with, the regime obtained Swiss-made intaglio printing presses
and installed them in a building called Printing House 62, part of the
national-mint complex in Pyongsong, a city outside Pyongyang, where a
separate team of workers manufactures the supernotes.

In 1996, frustrated by the high-quality imitations of its
currency in worldwide circulation, the United States government
redesigned the money for the first time since 1928. Out went the old-
fashioned symmetrical designs, replaced by the big-head notes. Almost
everything about the new design was aimed at frustrating potential
counterfeiters, including a security thread embedded in the paper, a
watermark featuring a shadow portrait of the figure on the bill and
new microprinting, tiny lettering that is hard to imitate. The most
significant addition was the use of optically variable ink, better
known as O.V.I. Look at the bills in circulation today: all 10s, 20s,
50s and 100s now feature this counterfeiting deterrent in the
denomination number on the lower-right-hand corner. Turn the bill one
way, and it looks bronze-green; turn it the other way, and it looks
black. O.V.I. is very expensive, costing many times more than
conventional bank-note ink.

A Swiss company named SICPA is the major manufacturer of
O.V.I., and the United States purchased the exclusive rights to green-
to-black color-shifting ink in 1996. Other countries followed,
purchasing color-shifting inks of different colors for their own
currency. One of the first countries to do so, interestingly enough,
was North Korea, whose currency, the won, counterfeiters ignore. North
Korea purchased O.V.I. from SICPA that shifts from green to magenta.
For the purposes of counterfeiting American currency, it would be a
smart choice: magenta is the closest color on the spectrum to black.
The green-to-magenta ink can be manipulated to look very close to
green-to-black ink, Daniel Glaser of the Treasury Department told me.
They took this stuff the same year we went to O.V.I. According to
Glaser, the North Koreans managed to fiddle with the new ink,
obtaining an approximation of the O.V.I. on the bills.

Though there is some dispute on the timing, the first
counterfeit big-head supernotes might have arrived on the market as
early as 1998. Like the earlier generation of supernotes, the big-head
imitations show an ever-growing attention to detail. They would
certainly fool me, said Glaser, who points out that the defects of the
supernote are arguably improvements. He recalled looking at the back
of a $100 supernote under a magnifying glass and noticing that the
hands on the clock tower of Independence Hall were sharper on the
counterfeit than on the genuine.

From all accounts, superb quality is a feature of much North
Korean contraband: methamphetamine of extraordinarily high purity;
counterfeit Viagra rumored to exceed the bona fide product in its
potency; supernotes. Its an impressive product line for a regime that
can barely feed its people. When I discussed this with Asher, he let
out a sigh. I always say that if North Korea only produced
conventional goods for export to the degree of quality and precision
that they produce counterfeit United States currency, they would be a
powerhouse like South Korea, not an industrial basket case.

The Threat

How many supernotes are in circulation, and what sort of
provocation do they represent?

Most government officials interviewed for this story declined
to give an estimate, but several, including Michael Merritt of the
Secret Service, noted that his agency has removed $50 million worth of
supernotes from circulation. That is a far cry from the billions
predicted by Representative Bill McCollums task force in the early
1990s, and while it may still sound like a lot, it is insignificant
relative to the $12 trillion dollar American G.D.P.

When supernotes are discovered in a smaller foreign economy
that makes use of American currency, they can cause a local crisis of
confidence in the dollar (this has happened in Taiwan and Ireland, for
instance). But in the United States, the economic threat is minimal.
For this reason, many analysts, particularly those outside the
administration, like Raphael Perl of Congressional Research Service,
express concern about making the issue into a diplomatic crisis. Perl,
who agrees that the North Koreans are behind the counterfeiting, told
me that because American government officials often view the violation
of the currency as a matter of national honor, there is an emotional
factor that could get blown out of proportion. In the process, he
argued, counterfeiting can become conflated with other, more pressing
problems posed by the North Korean regime, like its nuclear threat.

This conflation may also be deliberate. According to Kenneth
Quinones, who was the North Korea country director in the State
Department in the 1990s, hawks in the current administration may be
trying to use the counterfeiting issue to impede negotiations with the
regime over its nuclear program. Critics of this approach note that
the freezing of the North Korean bank accounts took place in the same
month that participants in the six-party talks, the multination
negotiations over North Koreas nuclear program, hammered out an
agreement that the regime would abandon its nuclear-weapons program.
North Korea soon reneged on its promise to abandon its nuclear program
and has since refused to rejoin the talks until the United States
lifts the designation on Banco Delta Asia. The hawks, Quinones told
me, are attempting to use these sanctions to help bring down the

The senior administration official interviewed for this
article dismissed that claim. The notion that there was a grand
conspiracy by hard-liners is just wrong, he told me. Its not accurate.
This was done as a law-enforcement action by appropriate U.S.
government agencies based on the facts of the case.

Even if the counterfeiting is not worthy of being a diplomatic
issue unto itself, the fact that North Korea is counterfeiting may
still serve as a grim reminder of the difficulty of good-faith
negotiations with North Korea. Just consider that the supernotes that
were seized by law-enforcement officials in New Jersey and California
arrived in the United States while the six-party talks were going on.
Asher, for one, was stunned by the audacity of the regime. If theyre
going to counterfeit our currency the entire time theyre engaged in
diplomatic negotiations, what does that say about their sincerity? he
asked me. How can they want normalization with a country whose
currency theyre counterfeiting? How can they expect it?

However the diplomatic standoff is resolved, Asher said that
he believes North Korea wont continue to counterfeit much longer. Next
year, the Bureau of Engraving and Printing is issuing an updated
version of the $100 bills. The notes will be expensive to manufacture,
requiring the purchase of a new set of presses at a cost that Asher
estimated in the hundreds of millions of dollars. The Treasury
Department characterizes the next generation of notes as part of a
routine redesign that it will undertake on a regular schedule every
decade. But Asher has no illusions as to the timing. It might be a
routine update, he said, but its a routine update that’s being
instigated by one country: North Korea.


Cashing in on Colonial Currency
BY Jack Lynch  /  Summer 2007

In September 1995, the Washington Post reported a press conference in
which the United States Department of the Treasury announced “the
first major redesign of the nation’s currency in 66 years”:

Treasury Secretary Robert E. Rubin hailed the changes as
“substantial,” saying they offer new security to currency that is
increasingly threatened by counterfeiters and high-tech copying
machines…Treasury officials stopped short of claiming that the new
bills will foil counterfeiters. “As the Secret Service tells us, there
is no bill that is not counterfeitable, but this bill substantially
raises the hurdle,” said a senior Treasury official.

This was not the first time the United States government redesigned
its money to stay ahead of counterfeiters. Such changes began before
there was a Treasury Department–as historian David R. Johnson writes:
“In the early eighteenth century, counterfeiting in America entered a
kind of golden age that would last for roughly a hundred and fifty
years.” And these were high-stake years, because phony money
threatened to weaken confidence in the finances of the young nation.
Without trust in the dollar, there could be no commerce; without
commerce, there could be no country. The history of America’s money is
largely a history of the struggle to keep a step ahead of the forgers.

Counterfeiting in America goes back to the first English settlements
in the New World. Many Native American tribes used polished
cylindrical shells as currency: the Algonquian word “wampumpeag” gave
us the more familiar “wampum.” In the early seventeenth century, not
long after Europeans landed on the eastern seaboard, unscrupulous
traders would dye the less valuable white shells to look like more
valuable blue-black shells. Roger Williams wrote in his Key into the
Language of America about the abundance of “counterfeit shell,” and
said that some Indians passed “stone and other materials” as if they
were wampum.

As European American settlements grew and economies became
established, coins took the place of shells. In order that “quoine may
not be counterfeited,” a Virginia law of 1645 required a new design of
the colony’s money every year–“a new impression which shall be
stampted yearly with some new ffigure”–to make it difficult for the
forgers to keep up with the changes. Virginia also provided that
“capitall punishment” would be the penalty for “those who shall be
found delinquents therein.” But the added difficulty and the severe
penalties were not always enough to discourage the dishonest.

A common practice was to clip or shave small amounts of silver or gold
from each coin and to accumulate enough shavings to sell them as
bullion. Coin clipping prompted monetary crises across Europe and its
colonies, forcing people to rethink the notion of value. A shilling
coin, for example, was supposed to contain one shilling’s worth of
silver–but, as the coins passed through one unscrupulous hand after
another, more and more metal was trimmed, and the difference between
intrinsic values and face values grew ever wider. In 1662, therefore,
England began using machines to give coins milled edges, like the
ridges that appear on modern dimes and quarters, which make it easier
to spot clipped coins. But the older pieces remained in circulation
until the end of the century, and they continued to be clipped.
According to one estimate, by 1695, clippers had reduced the old
handmade coins to about half of their original weight, the rest of the
gold and silver circulating in an underground economy. It took a
systematic revaluation of the currency, with all the old hand-minted
coins removed from circulation, to solve the problem.

As coin clipping became more difficult, would-be criminals turned from
shaving money to making it. More than one reason made counterfeiting
an appealing crime. For one thing, many acts of counterfeiting were
not illegal. Most laws banned the forgery of the currency of a single
colony, but clever malefactors could relocate to another colony–or,
better yet, another country. Ireland, for instance, had no law against
manufacturing American currency, and forgers set up workshops there.
Over and over, we see cases of counterfeiting that remained within the
bounds of the law, which forced legislators to revise statutes to
compass new criminal practices.

Maryland’s experience is typical. In 1638, the assembly declared it
treasonable to counterfeit the king’s coin–a felony warranting death.
Thieves took to coin clipping, which the Maryland Assembly was forced
to outlaw in 1661. But this expanded law considered only British
coins: there was no restriction on coining or clipping foreign money.
The legislators had to broaden the law again in 1707, declaring that
anyone convicted of forging foreign gold or silver would be pilloried,
whipped, and have both ears cropped. In 1758, it was time to widen the
scope once more, making it illegal “to forge or counterfeit the Bills
of Credit of Virginia, or the Provinces of Pennsylvania, New-York,
East and West Jerseys, and the Three Lower Counties on Delaware.”

Even under the more expansive laws, though, the odds of being caught
were low, and most counterfeiters never faced prosecution. Because
British coins were scarce in America, foreign coins were common. But
the resulting variety of circulating coins–Spanish pieces of eight,
Portuguese moidores, Dutch and German thalers–meant that honest
dealers had trouble distinguishing the real from the bogus, and
prosecutions were rare. The few criminals who were caught usually
foolishly betrayed themselves, as when, in 1774, a London
counterfeiter sent his young daughter to a shop to buy some beer for
her father. As Kenneth Scott, the leading authority on early American
counterfeiting, describes it, “When the landlord happened to observe
to the little girl that the coppers were warm, she innocently replied
that her daddy had just made them.” Miscreants who did get caught
could still hope for a happy ending. As Scott writes, “The jails of
the day were extremely weak and poorly guarded, so that a
counterfeiter who was caught knew that he had a better than fifty-
fifty chance to slip out of the prison at night.”

More troublesome than coins were banknotes, a relative novelty in the
eighteenth century. Britain tried to prevent its colonies from using
paper money, but, with so little precious metal available in her New
World possessions, the colonies were forced to issue bills of credit–
this at a time when most Europeans distrusted paper money. As America
began its struggle for independence, though, it had to rely
increasingly on paper to raise funds for the war. The public’s faith
in the new money was low, especially because the Continental bills
really amounted to bonds payable after an American victory–an outcome
some believed would never come. The widespread distrust of these war
bonds prompted the Continental Congress to resolve on January 11,

that if any person shall hereafter be so lost to all virtue and
regard for his country, as to “refuse to receive said bills in
payment,” or obstruct or discourage the currency or circulation
thereof, . . . such person shall be deemed, published, and treated as
an enemy of his country, and precluded from all trade or intercourse
with the inhabitants of these colonies.

The resolution, though, did not put an end to the skepticism, and many
tradesmen either refused to take the banknotes or demanded a premium
for accepting them. Rampant inflation set in as the bills’ value
plummeted at exactly the time the fledgling government needed
resources. George Washington wrote in a letter to John Jay that “a
wagon-load of money will scarcely purchase a wagon-load of
provisions.” It didn’t help matters when, in January 1776, the British
government began undermining American independence by attacking the
American economy: it turned out great quantities of sham American
money, advertising in New York’s Tory newspapers that “Persons going
into other Colonies may be supplied with any Number of counterfeit
Congress-Notes, for the Price of the Paper per Ream.” Josiah Bartlett
said it was a “most diabolical scheme to ruin the paper currency by
counterfeiting it,” noting that the fakes were “so neatly done that it
is extremely difficult to discover the difference.” The “Tory plan,”
he said, was “one of the most infernal that was ever hatched.” It was
also the first recorded instance of wartime financial sabotage, which
has continued to the present. During the Second World War, the Nazis
put concentration camp prisoners to work forging Allied currency,
hoping to weaken the Allies’ economies.

Even during peacetime, paper money posed problems for the governments
and banks that issued it. The biggest difficulty, then as now, was
that it is easily copied. Melting and casting silver and gold require
not only expertise but expensive furnaces and workshops. But anyone
with a printing press could turn out banknotes. The problem is that
whatever can be printed by the virtuous can be imitated by the wicked.
Since counterfeiting can never be prevented altogether, the idea has
always been to make the process so complicated and time-consuming that
the effort required will not be equal to the face value of the phony
money. Printers of eighteenth-century currency resorted to special
typefaces and type ornaments, sometimes cut by hand, in the hopes that
counterfeiters would find it too expensive to reproduce the banknotes.

But the efforts were rarely successful: even when experts might be
able to recognize fake bills, the merchants who had to deal with them
were baffled. Historian Johnson writes, “Rural colonists were not very
familiar with paper money because their daily lives did not revolve
around commercial transactions; furthermore, they had a deep prejudice
against it because they did not regard it as ‘real’ money.” Because
merchants lacked familiarity with authentic paper money, they could be
fooled by some surprisingly amateurish counterfeits. Kenneth Scott
catalogues some of the errors in forged colonial banknotes:

On bills made in Hammelbach justice was spelled instice; again,
droit was made dpoit and counterfeit turned into couuterfeit; two
crowns was converted into two crowes; thompson was written as thonnon;
the second d was omitted from the word woodbridge; Raper (a signer’s
name) was copied as Reper, Parker was spelled with an h; the e was
left out of the last syllable of december and the b out of publick;
the m in the word quartam was upside down.

Such problems led Benjamin Franklin to devise a scheme to make life
more difficult for counterfeiters. In 1739, a Pennsylvania twenty-
shilling note, signed “Printed by B. Franklin,” included realistic
images of three blackberry leaves and a willow leaf. It was the first
in a series of banknotes bearing images of leaves: they can be found
on the colonial and revolutionary bills of Delaware, Maryland, New
Jersey, Pennsylvania, and the Continental Congress.

Franklin was inspired by engraver Joseph Breintnall, who developed a
technique for reproducing leaves. On Breintnall’s nature prints there
appeared a caption, “Engraven by the Greatest and best Engraver in the
Universe”–God himself–because they seemed to go beyond the abilities
of the best human engravers. The images are remarkably realistic: as
numismatic historian Eric P. Newman put it, Franklin realized that
“leaves not only had exceedingly complex detail but also that their
internal lines were graduated in thickness. This would make virtually
impossible a fine reproduction by engraving.” As long as the technique
could be kept secret, they would be as close to counterfeit-proof as
anyone could hope for.

The founders were aware of these problems when they designed the
United States Constitution. Article I, Section 8, grants to the
federal government the power “To coin money, regulate the value
thereof, and of foreign coin.” But things did not improve in the early
days of the republic: Johnson writes that “when the Civil War erupted,
perhaps as much as half of the paper notes in circulation were
counterfeit.” Only after the Secret Service assumed responsibility for
protecting the nation’s currency in 1865 did the proportion of false
money begin to decline.

The Secret Service, now part of the Homeland Security Department,
still has the responsibility for anticounterfeit initiatives, and,
though things are much better than they were before the Civil War,
false currency remains a threat. Estimates of the amount of
counterfeit United States money in circulation vary widely, but at
least $62 million in counterfeit currency was removed from circulation
in 2006. And so the struggle between forgers and governments, a
strange kind of fiscal arms race, goes on. Each time counterfeiters
master a new technology, the Treasury Department has to redesign its
banknotes to make them a little more difficult to duplicate. A new
series of bills appeared in the mid-1990s, for instance, and yet
another round followed beginning in 2003, when the $20 bill was
redesigned once again. The $50 bill followed in 2004, and the $10 bill
in 2006; a new $5 bill is to be rolled out early in 2008, and the $100
bill is to follow. This latest series of bills includes such high-tech
anticounterfeit devices as watermarks, security threads, and color-
shifting ink. But these technological breakthroughs should not permit
complacency: the counterfeiters will soon discover a way to reproduce
the most advanced security devices we have today.

The long war between the government and the counterfeiters shows no
signs of abating. That is why the Treasury Department has announced
plans to redesign the currency every seven to ten years, as advances
in security technology allow them to stay ahead of advances in
counterfeiting. With each alteration of our money, the government
pursues the struggle against a plague that has afflicted the nation
since colonial days.



A Counterfeiting Silversmith
BY Harold B. Gill Jr.  /  Summer 2007

Eighteenth-century Virginians denominated counterfeiting a capital
crime in two senses of the word. An attack on the currency, and
therefore the economy, of his majesty’s colony, it was treason, a
felony punishable by the hangman.

Consider the case of silversmith Lowe Jackson, turned off on
Williamsburg’s gallows, despite pleas from the powerful for his
pardon, for making his own Spanish doubloons. The beginning of his end
was the attempt of Williamsburg barber Robert Lyon to spend one of the
bogus coins in the summer of 1750. As General Court Judge John Blair
described it, Lyon was taken to the courthouse, where some of the
doubloons were broken and “except for a thin plate of Gold on the out
Side, were found stark nought.”

Blair suspected someone was using Lyon as a front to get the fake
money in circulation. Blair put his money on Jackson. A Nansemond
County silversmith, Jackson once had been tried for counterfeiting but
escaped punishment through, as Blair put it, “some chicanery of the

Threatened with trial for uttering the counterfeits– conviction meant
death–Lyon told “all he knew.” He said sometime Annapolis tavernkeeper
Edward Rumney–“aged about 40 Years, of a middle Size, full faced,
black Complection, smooth Tongue, and free of Speech, much addicted to
playing at Billiards, and Gaming”–took him to Jackson and that he was
“drawn in much against his Will.”

Jackson told Lyon that he and his brothers John and James made the
coins and that “they were little worse than good Ones.” Blair issued a
warrant for their arrest, but the sheriff found they had fled. Blair
guessed John and James Jackson had “gone to the Northward, but”
supposed Lowe Jackson “to be gone to North Carolina.”

Virginia Council President Thomas Lee issued a hue and cry–a
proclamation authorizing the pursuit and capture of suspects. It
charged Lowe Jackson, a carbuncle-faced young man of about five- feet-
ten, “with coining, counterfeiting, and uttering many base double
Double-Loons.” His brothers, one a watchmaker and the other a
blacksmith, “are strongly suspected of being concerned in the said
Treason.” Rumney, who Lee thought had gone to Maryland, too, was
accused “with aiding and assisting.” Lee offered a £50 reward for Lowe
Jackson and £20 for the other three.

Authorities captured Lowe Jackson in Charlestown, South Carolina, and
the Virginia Council sent Edmund Ruffin to bring him back to
Williamsburg for trial. What became of the other fugitives, we do not

Before a crowd, Jackson was tried in the General Court on April 16,
1751. The record is gone, but it appears Lyon’s testimony was
discredited. The jury, deliberating until “between 6 & 7 in the
Evening,” convicted Jackson anyway.

Within days, there was talk of a new trial. The Reverend David Masson
and other prominent Williamsburg people thought Jackson should be
pardoned. Lewis Burwell, now council president, had power to pardon
“fit Objects of Mercy, Treason and willfull Murder only excepted,”
wrote a letter to the Duke of Bedford begging for the king to pardon
Jackson, and granted a reprieve until the king’s pleasure was known.
He said Jackson was a young man who was seduced by Rumney, “an
infamous Villain who had the Art of Counterfeiting Coins and put this
Youth upon it.” Carter Burwell of Carter’s Grove also wrote on
Jackson’s behalf. Blair and the other councilors disagreed with
Burwell, however, and wrote the duke opposing a pardon.

Newly arrived Governor Robert Dinwiddie examined the trial record and
said that the “Tryal I find was conducted with much Candour &
Impartiality” and “I cannot possibly join the President in Soliciting
his Majesties Pardon & do think the Councills Remonstrance &
Representation of the Affair is perfectly Just.” The king declined to

April 13, 1753, after languishing in the Williamsburg jail for nearly
two years, Jackson was executed “at the Gallows near this City.” The
Pennsylvania Gazette reported:

“He was drawn on a Sledge from the Prison to the Place of
Execution where he addressed himself to the Spectators, in a very
moving and pathetic Speech on the fatal Consequences attending an
early Habit of Vice, which had been the Means of bringing him to that
shameful and untimely End. He appears with a Composure of Mind, not
frequently attending Men in his unhappy Circumstances, and died in a
very penitent Manner. His body being put into a Coffin, with this
Inscription, Mercy! Triumph over Justice, was delivered to his
Friends, and is to be interr’d in the County of Nansemond, where he
was born.”


Possible Responses To Counterfeiters: Plastic Money And Bills That
BY Jeff Nesmith  /   February 27, 2007

WASHINGTON — Plastic money, bills with built-in magnifying glasses,
and even audible money are among technologies the government could use
to “stay a step or two ahead of counterfeiters,” a National Academies
committee said Monday. But something will have to be done soon, said
the committee, because within the next 10 years counterfeiters will
have won the “battle of the printed image.” Already, major
counterfeiters can duplicate most U.S. bills so accurately that
sophisticated forensic analysis is required to distinguish them from
the real McCoy.

An estimated 30 of every 1 million $100 bills in circulation worldwide
are counterfeit, the committee noted. Last year, the government
formally charged several individuals in a “supernote” counterfeiting
ring and linked one of them to the government of North Korea. The
ring’s fake $100 bills were printed on paper that has the same fiber
content as U.S. bank notes and used sophisticated inks that change
color according to the angle at which they are viewed, according to
University of Georgia counterfeiting expert Stephen Mihm.

Even less sophisticated counterfeiting is getting easier, the National
Academies committee said in its report. Advances in digital imaging
and printing mean that within a decade even “low-skill printers will
be able to duplicate almost any two-dimensional image,” the panel’s
experts said. Before that happens, the government’s Bureau of
Engraving and Printing, which prints U.S. bank notes, should start now
exploring new steps to frustrate counterfeiters, the panel said. They

— Plastic bills. Since 1996, when Australia converted its currency to
polymer-based “substrates,” many other countries have followed suit.
The committee said that if the United States began to use plastic for
$1, $2 and $5 bills, the practice of bleaching low-denomination
currency and printing larger notes on the paper would frustrated. A
drawback would be the loss of the “tactile familiarity” of U.S.
currency, which experts told the committee is the main way people
judge its authenticity. In fact, the first $100 “supernote”
counterfeit was spotted by a cash handler who said it “didn’t feel

— Money with a small Fresnel lens — the flat magnifying glass sold in
novelty stores — incorporated into the paper. By curling the bill, a
user could read extremely small “microprinting” and other tiny
features that cheap printing equipment cannot duplicate.

— “Windows” of different sizes could be cut into currency, so that a
large window on a $1 bill would be out of place on a falsely reprinted
$100 note that should have a small window.

— New versions of color-shifting inks, plus holographic strips and
embedded optics that produce distinctive light reflections.

In the longer term, the panel said possible anti-counterfeiting
measures could include:

— Genetically engineered cotton to produce fibers that show highly
visible color shifts.

— Embedded electronic sensors that emit a visible or audible response.
For example, they might respond to human breath with an authenticity

“As counterfeiting technology continues to improve, the committee
foresees an increased interest by cash handlers in using simple
devices in authenticating bank notes,” the report states. Whatever
approach is taken, the government should start investing now in the
research and development necessary to produce “game-changing
technologies” in its eternal war with counterfeiters, the panel said.
But the victory may be short-lived.

“It’s almost inevitable that sophisticated counterfeiters will
eventually lay their hands on whatever techniques they have to have,”
Georgia’s Mihm said in a telephone interview.


Losing faith in the greenback
How long will the dollar remain the world’s premier currency?
Nov 29th 2007

THE long-run value of all paper currencies is zero. That is a fond
saying of Bill Bonner, goldbug and publisher of the Daily Reckoning, a
contrarian financial newsletter. So why should the dollar be any
different? Mahmoud Ahmadinejad, Iran’s president, seems to think the
long run is now: two weeks ago he decried the dollar as a “worthless
piece of paper”. And Jim Rogers, a famously shrewd investor, asks why
anyone would buy dollars.

America’s currency has been infected by the sense of crisis that
bedevils its economy and financial markets. Speculative selling of the
dollar is close to an all-time high, reckons Stephen Jen at Morgan
Stanley. Many believe–and some evidently hope–that the greenback might
be on its way out as an international currency. Worrying parallels are
seen between the dollar’s recent fall and the decline of sterling as a
reserve currency half a century ago.

The dollar’s value against the basket of leading currencies tracked by
America’s Federal Reserve has recently been at an all-time low.
Against a broader range of currencies, the dollar has lost a quarter
of its value in the past five years. Its decline has been especially
marked against the euro. At one point in 2002 the euro was worth 86
cents; today it buys $1.48.

That currencies rise and fall and test records is hardly unusual. What
lends the dollar’s decline an air of crisis is that the world’s
bloated currency reserves are crammed with depreciating dollar assets.
Foreign-exchange stockpiles have almost tripled to $5.7 trillion since
the beginning of the decade. China alone has $1.4 trillion of
reserves. Japan’s $1 trillion or so make it the second-largest holder.

In this period of swelling reserves, the dollar has retained its pre-
eminence. It still accounts for nearly 65% of identifiable currency-
stockpiles, according to the latest IMF data. This is broadly in line
with its historical share (see chart). Factor in the dollars hoarded
by China and Middle Eastern oil exporters (not included in the IMF
breakdown) and the dollar’s share may be higher still.

Subprime currency

The dollar’s place as a reserve currency always seems to be questioned
when it falls. Weakness in 1977-79, 1985-88 and 1993-95 was each time
met with predictions that governments were about to switch their
reserves into another currency. A burst of high inflation, which
undermined the dollar in the late 1970s, made that slide as serious as
today’s scare is. Between 1978 and 1980 the Treasury sold $6.4 billion
of “Carter bonds”, mostly denominated in Deutschmarks, to raise funds
to defend the dollar. In January 1980 the gold price reached a record
$835 (around $2,250 in today’s prices) as investors sought an
alternative store of value. And when the dollar fell to ¥81 in 1995,
many–including this newspaper–saw it as the beginning of the end of
its reserve-currency status.

The dollar has weathered these storms. But now it faces a nasty squall
that combines both cyclical and structural blasts. Its decline in the
past five years has imposed a huge capital loss on foreign-exchange
reserves. If this becomes too painful, central banks may be tempted to
cut their losses and dump their dollars, causing a slump in the
currency’s value. The lure of selling is made all the greater by the
knowledge that other central banks are overloaded with dollars too.
Those that get out first have more chance of saving their capital.

America’s thirst for overseas funding is another reason to fret. For
years it has spent more than it earns, running up large, persistent
current-account deficits. Last year the shortfall in America was a
whopping 6% of GDP. Bridging that gap requires foreigners to buy
dollar assets–bonds, stocks or property. But the more overseas debt
that America runs up, the greater the risk that it will partly default
on its obligations, either through currency weakness or inflation.

These vulnerabilities are not new but they are made worse by an
economy that is turning sour. Losses on subprime mortgages have
intensified the housing downturn in America and poisoned its credit
markets. The threat of recession has prompted two interest-rate cuts,
and more reductions are likely. Faltering growth and falling interest
rates make for a weak currency, particularly when growth prospects
elsewhere seem rosier. And the downgrades to credit-related securities
once deemed top-notch have hurt the reputation of America’s capital

America’s downturn poses other problems too. The oil-rich Gulf states
are thinking of ditching their currency pegs with the greenback. These
links have obliged them to buy dollars, so as to prevent their own
currencies from rising. The dollar peg has made it hard to curb
inflation, especially in fast-growing oil economies, whereas a less
rigid exchange-rate regime–say, a peg with a basket of currencies–may
allow a more flexible interest-rate policy. Such a regime would also
crimp the demand for dollars at a time when confidence in the currency
is fragile. All this may not bode well for the dollar’s status as the
world’s reserve currency.

However, even if this is an awkward time for the currency, it need not
be a catastrophic one. The fear that the dollar could be swiftly
supplanted as top dog is based on the idea that one currency will
always have a near-monopoly: if everyone holds dollars chiefly because
everyone else does, you could imagine how a falling share of global
reserves might reach a point when central banks all suddenly switch to
a new currency standard.

The dollar’s favoured position in international trade owes something
to this kind of network effect. Global markets in commodities are
priced and transacted almost exclusively in dollars, because it is
convenient for buyers and sellers. But whatever Mr Ahmadinejad thinks,
oil exporters would not get more income if commodities were priced in
euros or pounds. The competing pressures of supply and demand set the
oil price: the dollar is just an easy way of keeping score. The
convention of quoting in dollars is often employed when the currency
of one or more trading partners is not used. Once such a standard is
set, there are costs to shifting to a new one. But the benefits to
America of issuing the world’s favoured transaction currency are
easily exaggerated. Advances in financial technology mean that a given
volume of trade requires a much smaller dollar-float than in the past.
The confidence factor

The role for the dollar as an international means of exchange is
entirely different from its role as a reserve currency. Reserves are
held to buttress confidence in a country’s own currency, not as a
float for global trading. As a backstop, reserves need to be easily
convertible (so they can be used as an emergency source of liquidity)
and a good store of value. The dollar, with its large and liquid
capital markets, meets the first criterion even if it has failed the
second–at least, recently.

Barry Eichengreen, a professor of economics at the University of
California, Berkeley, argues that there is no reason why a single
currency should dominate reserves as the dollar has. Before the era of
the dollar standard, he points out, reserves were in a handful of
currencies. On the eve of the first world war, when Britain was the
greatest trading power, the pound’s share in official currency
reserves was all but matched by the combined share of the French franc
and German mark. After the war a three-way split was maintained, with
the dollar replacing the mark.

If the dollar’s dominance is to end, two or more currencies are likely
to share the crown. Those who take a grand sweep of history are
backing China’s yuan as a big reserve currency of the future. The
dollar’s immediate rival, however, is the euro. In several important
respects–the euro area’s size, the depth of its capital markets and
its share of world trade–it has the attributes of an ideal reserve
currency (see table below). Unlike America, the euro area has the
added attraction of a broadly balanced current account.

The euro has already made inroads into the dollar’s territory. At its
launch in 1999, its constituent currencies–the mark, franc, lira, etc–
accounted for less than a fifth of the world’s official reserves. Its
share has since increased to around a quarter, even as total currency
reserves have swollen. The euro area is less dependent on oil imports
than America is and it sells more to oil exporters as well as to fast-
growing economies such as China and Brazil.

The euro’s attractions may be somewhat superficially enhanced at the
moment. It has risen sharply in value, flattered by cyclical forces
that have favoured it over the dollar. But only a year ago Italy’s
sluggish economy and fiscal problems inspired talk about a break up of
the euro. Just five years ago the euro was considered irredeemably

But although the near-term outlook may be favourable to the euro, its
prospects in the medium-term may not be so bright. The euro’s
appreciation is already causing strains within the currency zone. In
the coming decades the euro zone’s workforce is set to age faster than
America’s, which will hamper its economy and add to its fiscal
pressures. There is also the question of how much trust investors will
put in a currency with no central fiscal authority to stand behind it.

Since the title of reserve currency can be split, the dollar’s share
in global currency reserves is probably too big–whatever happens to
foreign-exchange rates. Many of the countries that have built large
stocks of dollar assets by pegging their currencies to the greenback
are now battling with inflation. Sticking with the peg would mean
importing the policies of recession-threatened America and feeding
inflation still more. Yet abandoning the peg only adds to the pressure
on the dollar.

A compromise is to be weaned off the dollar, with a peg made up of a
basket of rich-world currencies, including the greenback. This would
give dollar-peggers more freedom over their monetary policy–they would
no longer have to mimic the Fed slavishly–while allowing them
gradually to slow their purchases of dollars.

Is a dollar rout avoidable? An optimist would say that central banks,
having spurned the chance to diversify out of dollars when a euro
could be bought for 86 cents, are unlikely to want to switch now when
the price is close to $1.50. Against conventional benchmarks like
purchasing-power parity, the euro looks dear against the dollar. So it
could be a bad time to swap from one horse to another. To the extent
that dollar-holders act like an informal cartel, then the biggest
dollar-holders will set an example. Japan seems unlikely to start
selling its huge dollar reserves–if anything it might intervene to
prevent the dollar falling further against the yen. A crash might be
averted if China holds fast too, because it recognises how self-
defeating dumping dollars would be to such a large owner of American

Yet a pessimist would counter that a revaluation of emerging-market
currencies against the dollar could easily turn disorderly. Although
economic logic may argue against selling dollars at a cyclical low
point, central banks have sometimes been hopeless portfolio managers:
witness their shift out of gold just as its price hit a low. Yes, the
dollar looks cheap, but currencies often overshoot. So it would be
foolish to say where its decline should stop.

Averting a crash

Despite the anxiety and gloom, some straws in the wind suggest that
the dollar’s decline may soon slow. In the past few weeks it has
regained ground against a handful of important currencies, including
the pound and the Australian dollar. America’s trade balance is
narrowing, despite the effects of expensive oil imports, suggesting
that a weaker currency is already working to correct imbalances.

As a rule, central banks cannot intervene to determine exchange rates,
but as Morgan Stanley’s Mr Jen suggests, some sort of official action
has often preceded turning points in the world’s foreign-exchange
markets. If he is right, then a change in rhetoric or even co-
ordinated intervention may be the signal the markets need before they
stop believing that the dollar is destined to fall further.









BY Jeffrey A. Frankel  /  17 May 2005
Peg the export price index: A proposed monetary regime for small

“This paper proposes a new monetary regime for small open economies:
Peg the Export Price Index (PEPI). An earlier version, Peg the Export
Price (PEP), applied to countries that were specialized in the
production of a particular agricultural or mineral commodity. PEP
proposed fixing the price of the single commodity in terms of local
currency. It has been objected that PEP is inappropriate for countries
where diversification of exports is an issue. For such countries the
modified version, PEPI, proposes fixing the price of a comprehensive
index of export prices. In either version, one advantage is that the
currency depreciates automatically when the world market for the
country’s exports deteriorates. This is an advantage that floating
rates also promise, but deliver only partially, as calculations here
show. The other advantage of PEPI is that the currency does not
appreciate when the world price of the country’s imports goes up. The
candidate for nominal anchor that is currently most popular, targeting
the CPI, has this unfortunate property if literally interpreted, as
calculations here show. Overall, the advantages of PEPI can be summed
up by the observation that, unlike other proposed nominal anchors, it
is relatively robust with respect to terms of trade shocks. ”


Executive Summary

Federal Reserve monetary policy has traditionally focused on the
domestic economy. Over time, however, a number of significant trends
have underscored the potential importance of the international
dimensions of contemporary monetary policy. Such trends include the

* Financial markets continue to become increasingly integrated
internationally; capital is evermore mobile.
* The U.S. dollar continues to remain the world’s principal
international currency despite evolving exchange rate arrangements.
* Official and unofficial dollarization has continued in several
emerging market economies.

These trends suggest that monetary policy may have differing
transmission mechanisms increasingly involving international variables
than was earlier the case. In addition to these trends, empirical
evidence recently has accumulated showing that changes in U.S.
monetary policy can significantly impact emerging market economies in
a number of ways. For example, changes in U.S. monetary policy can (1)
dominate capital flows in emerging market economies, (2) be associated
with financial crises in these countries, and (3) significantly impact
interest rates and financial markets in emerging economies under
differing exchange rate arrangements. Furthermore, experience shows
that the Federal Reserve can successfully assume international lender-
of-last-resort responsibilities and stabilize world financial markets
in situations of international liquidity crises.

The Federal Reserve should increasingly recognize these
international considerations when conducting monetary policy.


International Dimensions to U.S. Monetary Policy

I. Introduction

Traditionally, Federal Reserve monetary policy has focused on
the domestic economy. Although international factors have not been
ignored, they have been subordinate to domestic concerns.
International concerns are rarely important rationale influencing
Federal Reserve monetary policy decisions; further, the global impacts
of U.S. monetary policy decisions seldom receive much attention from
monetary officials.

Recent trends and developments, however, suggest this domestic
orientation may not be entirely satisfactory for U.S. monetary policy.
There is a growing recognition of the fact that financial capital is
increasingly mobile, and financial markets are evermore globally
integrated. At the same time, varying degrees of dollarization have
occurred in several emerging market economies and the dollar remains
the world’s principal international currency despite evolving
developments in exchange rate arrangements. These considerations have
a number of important implications for U.S. monetary policy. For
example, they help to explain why changes in U.S. monetary policy can
have increasingly potent effects on emerging market economies that
should be recognized and why the Federal Reserve’s implicit
international lender-of-last-resort (LOLR) responsibilities are so
important.1 These international considerations can be taken into
account by anchoring prices with a price stabilization policy goal and
using key market price indicators as policy guides.

After briefly describing these evolving circumstances — namely,
increased capital mobility, dollarization, and the international role
of the dollar — this paper briefly reviews the evidence suggesting
that changes in Federal Reserve monetary policy have implications for
both emerging markets and the global economy. Implications for the
Federal Reserve’s international LOLR role are highlighted and some
recommendations for monetary policy are outlined.

Recent Trends and Developments

*       Increasing Financial Integration and Growing Capital

Clearly, one important trend of recent years is increasing
international financial integration and growing capital mobility.2
Most economists now recognize the inexorable trend toward
globalization or growing international integration of financial
markets and increasing capital mobility. Empirical results, for
example, increasingly provide evidence of growing capital mobility. In
particular, data on capital flows as well as interest rate
differentials indicate that a growing degree of capital market
integration or increased capital mobility has occurred since the 1970s.
3 The U.S. economy, along with most other economies, is more open.
Many experts believe these trends are largely inevitable and
irreversible, partly because they are being driven by communications
and informational technological change and partly because policymakers
increasingly recognize the many compelling benefits of regulatory
changes that foster financial integration.4 Accordingly, a growing
consensus among economists is that there is no turning back: i.e.,
that capital mobility is here to stay.5

There are a number of important implications of this increased
international financial integration. This more open environment, for
example, implies that changes in monetary policy involve a somewhat
different transmission mechanism. In particular, the more integrated
the economy, the more quickly and substantially do divergent policies
affect financial markets and capital flows. And the foreign exchange
rate may play an increasingly important role in transmitting changes
in monetary policy to the macroeconomy. Accordingly, exchange rate
movements potentially may contain more useful information about
changes in monetary policy than in previous, more closed (less
integrated) circumstances.

*       Clarification of the “policy trilemma”

These altered conditions of increased capital mobility also
place important constraints on monetary policy, commonly referred to
as the “policy trilemma.” As Obstfeld ably describes it:

The limitations that open capital markets place on exchange
rates and monetary policy are summed up by the ideas of the
‘inconsistent trinity’ or …’the open- economy trilemma’ …that is, a
country cannot simultaneously maintain fixed exchange rates and open
capital markets while pursuing a monetary policy oriented toward
domestic goals. Governments may choose only two of the above.6

If capital mobility is, indeed, an irreversible given, the
policy choices circumscribed by the above trilemma are increasingly
limited. In particular, policy choices are now between flexible
exchange rate/domestic policy goal (e.g., inflation targeting) regimes
and fixed exchange rate/without domestic goal regimes.7 If
policymakers fix the exchange rate, they lose control of the interest
rate; if they peg the interest rate they can’t control the exchange
rate. In starker terms, capital mobility “confronts national
authorities with a decision over controlling either interest rates or
exchange rates.”8 Some authors [e.g., Obstfeld (1998), Eichengreen
(1996)] suggest that in recent years, the choice has moved mostly in
favor of the flexible exchange rates/domestic policy alternative:
i.e., mostly in favor of “controlling” interest rates rather than
exchange rates.9 The U.S. has evolved into such a regime: namely, a de
facto informal “inflation targeting” position.10 For most countries,
this result may be due in part to considerations of political economy;
contemporary political forces may mandate that domestic policy goals
be given attention.11 Nonetheless, the trend does underscore the
constraints brought to bear on policy choices by increased capital

*       The Continued International Currency Role of the Dollar

Another important trend relates to the continued international
currency role of the U.S. dollar. Despite the collapse of the dollar-
based Bretton Woods (fixed exchange rate) system and the move to more
flexible exchange rate arrangements, the dollar continues to be used
as the principal international currency. As Robert Mundell has aptly

Flexible exchange rates did not dispense with the need for
international reserves or end the dominant role of the dollar. In one
sense the dollar became more important than ever. The need for an
international unit of account for purposes of international trade and
finance was just as great as ever, and the increased uncertainty
associated with flexible exchange rates increased, rather than
eliminated the need for international reserve assets… The dollar
remained the principal international monetary reserve (in the 1980s
and 1990s). The enhanced role of the dollar under flexible exchange
rates was reflected in the rapid expansions of dollar reserves which
has more than kept pace with the growth of trade…12

More specifically, the dollar continues to provide the principal
functions of an international money and thereby remains the dominant
international key, vehicle, and reserve currency. This fact has been
documented by several recent studies [such as McKinnon (2000) and
Hartmann (1998)].13

The continued use of international currency suggests there
remains an important demand for the services of international
currency: i.e., continued demand for a “money for other monies.” Given
this existing global demand, important responsibilities accrue to the
supplier of this principal global currency, the Federal Reserve. In
particular, if the supplier of international reserve currency pays
attention to changes in its demand and, accordingly, adjusts supply to
match changes in the demand for international currency, global
stability may be promoted. This suggests that the Federal Reserve
should focus attention on price signals and should provide a
stabilizing price anchor for the current fiat money system. It also
suggests that the Federal Reserve — as the supplier of the dominant
international reserve asset — should recognize that when it tightens
policy (thereby restricting the supply of international reserves),
other central banks may well tighten, and when it eases, others may
ease. In short, its policy moves can be magnified or made more potent
because of these reactions. Additionally, the use of global reserves
suggests the need for the services of an international lender of last
resort (LOLR) for liquidity crisis situations involving sharp
increases in the demand for international reserves.14 Since the
Federal Reserve is the ultimate supplier of this liquidity, these
international LOLR responsibilities fall upon the Federal Reserve.

*       The Dollarization of Emerging Market Economies

Another notable and related development relates to the
dollarization — the official and unofficial use of the dollar to
displace domestic currency — in several emerging market economies. A
number of studies examining the extent of such dollarization suggest
that it is substantial in a number of countries, especially those in
Latin America as well as in Russia.15 Related evidence indicates that
foreigners hold significant percentages (above 50 percent) of dollar
notes in circulation.16

This widespread dollarization suggests that changes in U.S.
monetary policy may have important impacts on the many users of
dollars. Accordingly, there may be potential implications for Federal
Reserve monetary policy. Since these effects of changes in Federal
Reserve policy can be nontrivial, it may be desirable to consider them
in policymaking deliberations.


The trends and developments outlined here can have some
important implications. All of these factors — the increased
international integration of financial markets together with
dollarization and the continued international currency role of the
dollar — suggest that changes in Federal Reserve monetary policy may
have differing effects than revealed in earlier experience. With this
more open economy and key role of the dollar, the transmission
mechanism of U.S. monetary policy may have changed. In particular,
various financial markets (e.g., foreign exchange, bonds, equities)
may currently play a more significant role in transmitting changes in
monetary policy. Changes in U.S. monetary policy may have more potent
impacts on foreign countries than earlier was the case. And the global
economy itself may experience different impacts of changes in Federal
Reserve policy.

Some Emerging Empirical Evidence

A growing body of empirical evidence suggests that changes in
Federal Reserve monetary policy can have significant impacts on
foreign countries, on international financial variables, and, indeed,
on the global economy. This evidence, however, is dispersed among
varieties of research concerned with related, but differing topics;
for example, empirical evidence on the Federal Reserve’s international
effects has emerged from studies examining the determinants of capital
flows in emerging markets, the causes of recent banking and currency
crises, and the choice of exchange rate regimes. The evidence is not
centralized in readily accessible literature, in part because there
are multiple channels through which changes in U.S. monetary policy
can have its foreign impact. The form of this impact, moreover,
depends in part on the existing exchange rate regime.

This diverse literature relating to the international dimension
of changes in Federal Reserve policy is organized into three
categories and briefly surveyed as follows:

*       Studies examining the determinants of capital flows.

Recently, a number of studies have analyzed the determinants of
sensitive capital flows to emerging market economies. Initially,
researchers focused on the performance and differing characteristics
of individual countries in explaining these capital flows; however,
they soon noticed that capital flows tended to affect many emerging
economies at the same time, despite their differing characteristics.
In short, common (international) factors appeared to be important
determinants of these movements.

More specifically, investigators found that factors external to
these emerging market economies — such as international interest rate
movements in large industrialized economies and financial centers such
as the U.S. — played a significant role in explaining these capital
flows. In particular, changes in U.S. monetary policy tended to be
associated with changes in financial (money, bond, and equity) markets
in several emerging market economies. This was aptly stated by Calvo,
et al. (1996):

The tightening of monetary policy in the U.S. and the
resulting rise in interest rates in early 1994 made investment in Asia
and Latin America relatively less attractive… higher interest rates
quickly and markedly affected developing country debt prices. Indeed,
the rise in U.S. rates also triggered market corrections in several
emerging stock markets. It seems likely that with highly integrated
and technologically sophisticated financial markets, changes in
relative rates of return will quickly translate into cross-border
capital flows.17

Similarly, Goldstein and Turner (1996) argued that:

…empirical evidence suggests that movements in international
interest rates can explain between one-half and two-thirds of the
swings in private capital inflows to developing countries in the

Studies reaching conclusions consistent with these arguments
include: Calvo et al. (1993), Dooley et al. (1994), Chuhan et al.
(1993), Goldstein (1995), Fernandez-Arias (1994), Eichengreen (1991),
and Eichengreen and Fishlow (1996).19

In short, this literature establishes that changes in external
(or global) factors such as movements in the interest rates of leading
industrial countries like the U.S. significantly influence emerging
market financial markets and can be dominant determinants of capital
flows to these emerging economies (especially in Latin America).

*       Studies Examining the Causes of Recent International
Financial or Banking Crises

A number of studies have examined the factors causing recent
international financial or banking crises. While these studies
identify multiple factors contributing to these crises, the literature
does find that many banking crises in developing economies are
associated with prior increases in the interest rates of key developed
economies such as the U.S.

Eichengreen and Rose (1998), for example, note that:

Our central finding is a large, highly significant
correlation between changes in industrial-country (including U.S.)
interest rates and banking crises in emerging markets… Northern
interest rates rise sharply and significantly (relative to their level
in non-crisis control group cases) in the year preceding the onset of
banking crises, before peaking in the crisis year and the year
This result… points strongly to the role played by external
financial conditions — and in particular to the effect of rising
interest rates in worsening the access of developing-country banking
systems to offshore funds…
Our finding of an important role for world interest rates in
the onset of banking crises reinforces the conclusions of (others)…
for increases in world interest rates to precipitate banking problems.

Others have come to similar conclusions. Frankel and Rose (1996)
find that increases in developed country (including U.S.) interest
rates significantly enhance the likelihood of a currency crash in
developing countries; increases in foreign (e.g., U.S.) interest rates
play a meaningful role in predicting currency problems.21 Kaminsky and
Reinhart (1996) suggest that external factors such as increases in
interest rates in the U.S. may play an important role in explaining
the prevalence of banking and balance of payment crises.22 Results
consistent with this argument were attained by Chang and Velasco
(1998). These authors contend that “the 1997-98 crises in Asia were in
fact a consequence of international illiquidity” which could in turn
be partly rectified by the liquidity provision of an international
lender-of-last resort.23

In addition to evidence on the effects of changes in U.S.
interest rates on recent international financial crises, evidence also
exists as to the causal effects of changes in the foreign exchange
value of the dollar on such crises.24 While several authors mention
the role of dollar movements as contributing factors in the recent
Asian financial crisis, Whitt (1999) provides convincing evidence that
dollar appreciation prior to the recent Asian financial turbulence was
a significant contributing factor to this crisis.25 Specifically,
several key emerging economies in Asia tied their currencies to the
dollar, yet maintained significant trading relationships with Japan.
Consequently, a significant appreciation of the dollar relative to the
yen impelled these countries to follow the dollar (and U.S. monetary
policy), thereby causing their currencies to appreciate against the
yen. Consequently, their trade positions with Japan were severely
effected just before the currency attacks began, thereby significantly
contributing to the financial crises in Asia.26

*      Other Evidence

Evidence on the impact of changes in U.S. monetary policy on
foreign (international) interest rates recently has emerged from
research related to the choice of exchange rate regime literature. In
considering alternative exchange rate regimes available to emerging
market countries, for example, Frankel and others have examined the
interest rate responses in emerging countries to changes in U.S.
(Federal Reserve) interest rates.27 Frankel finds that when the
Federal Reserve raises interest rates, these increases are quickly and
entirely passed through to those emerging market economies with
exchange rates rigidly tied to the dollar. Such exchange rate regimes
require the emerging economy to follow the same monetary policy as the
U.S. regardless of its appropriateness to local economic conditions.
The situation is even more dramatic, Frankel finds, for emerging
market economies that maintained a “loose link” to the dollar (such as
Brazil or Mexico). In these cases, a Federal Reserve interest rate
hike induces local interest rates to increase by more than those in
the U.S.; these emerging market rates turn out to be more sensitive to
U.S. policy moves and rise by more than one-for-one.28 (Similar
results are found by Hausmann et al., and Frankel and Okongwu.)
Frankel argues that the reason for this surprising result is that the
U.S. interest rate increase has a large negative effect on capital
flows and international investors are nervous about the loose exchange
rate link, requiring an extra risk premium for devaluation and default
risk as well as for the lack of credibility on the part of
macroeconomic policymakers.

In short, this evidence indicates that changes in U.S. monetary
policy can have potent impacts on the interest rates in emerging
market economies under different exchange rate regimes. The evidence
suggests that as international financial markets become more
integrated, interest rates in emerging economies may become
increasingly sensitive to changes in the interest rates of large
developed countries.

The empirical evidence briefly outlined here indicates that
changes in U.S. monetary policy importantly affect financial markets
in emerging markets in a number of ways. These changes may dominate
capital flows in emerging market economies and U.S. rate hikes have
been associated with banking or financial crises in these developing
economies. Further, movements in U.S. interest rates may have potent
effects on interest rates in emerging markets under differing exchange
rate regimes.

*       Anecdotal Evidence: The Interest Rate Cuts in the Fall of

In addition to this growing collection of formal empirical
evidence, anecdotal evidence is also relevant. In particular,
assessments of the three Federal Reserve interest rate cuts in the
fall of 1998 led several analysts and “Fed watchers” to conclude that
international factors may have weighed heavily in precipitating this
Federal Reserve action.

These interest rate cuts, it will be remembered, took place in
the context of international financial market turbulence associated
with the Russian devaluation and debt moratorium in mid-August 1998.
It was during this period that the Federal Reserve cut interest rates
and took to monitoring risk and liquidity spreads after world
financial markets threatened to “seize up” following the Russian

The official rationale for these rate cuts was always framed in
terms of their effects on the U.S. economy. Nevertheless, FOMC minutes
indicated the moves were undertaken in light of the effects of the
prevailing global (international) turmoil including its impact on the
liquidity of financial markets.

In assessing the episode, various economists, “Fed watchers,”
and market observers generally concurred with the need for Federal
Reserve action. Their interpretations of this action, however, often
more explicitly recognized the international dimension of the Federal
Reserve policy moves and of the Federal Reserve’s implicit assumption
of important international lender-of-last-resort responsibilities
(associated with the dollar’s reserve currency status).

One well-known market observer, Allen Sinai, for example, argued

The Greenspan Federal Reserve appears to have shifted
regime, operating with a new policy framework that takes the world
economy and financial system into account, viewing the U.S. as one
component in this system.30

Another market observer remarked:

The Fed Chairman understood that he had to act quickly to
convince markets the U.S. central bank was ready to assist the world
economy in crisis.31

Similarly, in remarks to the American Economic Association in
January 1999, the IMF’s Stanley Fischer stated that:

…in recent months the leading central banks, in recognition
of the feedbacks between the emerging market and the industrialized
economies, have taken actions in the interests of their own countries
that stabilize the world economy.32

In short, in taking this action, the Federal Reserve indicated
it is capable of taking international, global factors into account
and, indeed, providing important international lender-of-last-resort
services, thereby serving to calm skittish world financial markets in
situations of sharp increases in demand for international liquidity.33
This is another manifestation of the international dimensions of
Federal Reserve policy, which is sometimes not explicitly recognized.


Federal Reserve monetary policy has traditionally focused on the
domestic economy. Over time, however, a number of significant trends
have underscored the potential importance of the international
dimension of contemporary monetary policy. Such trends include the

*      Financial markets continue to become increasingly
integrated internationally; capital is evermore mobile.

*      The U.S. dollar continues to remain the world’s principal
international (key, reserve, and vehicle) currency despite evolving
exchange rate arrangements.

*      Official and unofficial dollarization continues in several
emerging market economies.

These trends suggest that monetary policy may have differing
transmission mechanisms increasingly involving international variables
than was earlier the case. In addition to these trends, empirical
evidence recently has accumulated showing that changes in U.S.
monetary policy can significantly impact emerging market economies in
a number of ways. For example, changes in U.S. monetary policy can (1)
dominate capital flows in emerging market economies, (2) be associated
with financial crises in these countries, and (3) significantly impact
interest rates and financial markets in emerging economies under
differing exchange rate arrangements. Furthermore, experience shows
that the Federal Reserve can successfully assume international lender-
of-last-resort responsibilities and stabilize world financial markets
in situations of international liquidity crises.

Implications for U.S. Monetary Policy

Several important implications for U.S. monetary policy emerge
from these trends and growing empirical evidence. They include the

*       Given capital mobility and the practical reality that
political pressures will dictate a preference for domestic monetary
policy goals, the “policy trilemma” for the U.S. boils down to
flexible exchange rate arrangements and a price stability objective
for monetary policy.

*      The Federal Reserve cannot deviate from or lose sight of
its price stability goal, and the Federal Reserve should not sacrifice
domestic for other goals. Nonetheless, it may be desirable to
recognize the significant, increasingly important international
repercussions of changes in U.S. monetary policy in order to better
achieve these domestic goals. Recognizing these repercussions and
their potentially important feedback effects suggest that changes in
U.S. monetary policy may be more potent and wide-ranging than earlier
believed. Consequently, to best achieve domestic goals in a
nondisruptive manner, the degree or speed of policy moves may need to
be adjusted accordingly.

If these increasingly important repercussions and their potential
feedback effects (e.g. changes in exports, import prices, or capital
flows) can be identified, anticipated, and taken into account, their
effects potentially may be offset, resulting in smoother transitions
for the domestic economy and for financial markets. By taking these
effects into account, implementation of policy changes can result in a
less volatile, less costly, less disruptive outcome. Policy
implementation may be improved. In short, informal “inflation
targeting” by the Federal Reserve may be implemented in a way that
recognizes international concerns.

*      Recognizing these growing international impacts of changes
in monetary policy suggests that in order for the Federal Reserve to
best achieve its goals, policy changes may need to be undertaken in a
well-telegraphed, gradual, deliberate manner so that no policy
surprises or unanticipated repercussions occur, disrupting
international and domestic markets. In short, to promote stability,
the Federal Reserve may be well advised whenever possible to avoid
sharp, rapid, and unexpected policy changes.

*       The Federal Reserve should increasingly recognize
international LOLR responsibilities and be prepared to respond to
international liquidity crises.34

*      These international factors may best be taken into account
by maintaining a stable price environment and carefully, jointly
monitoring forward-looking market prices such as various bilateral and
broad trade-weighted measures of the dollar exchange rate, commodity
prices, and bond yields as policy indicators. These market price
indicators may in turn be supplemented by various measures of global
prices, world commodity prices, and global bond yields to gain
information about prospective global price movements, global price
expectations, and world liquidity.35

Dr. Robert E. Keleher
Chief Macroeconomist to the Vice Chairman


“The dollar is considered the standard unit of currency in commodity
markets across the globe (namely gold and oil). At the present time,
the U.S. dollar remains the world’s foremost reserve currency,
primarily held in $100 denominations. The majority of U.S. notes are
actually held outside the United States. According to economist Paul
Samuelson, the overseas demand for dollars allows the United States to
maintain persistent trade deficits without causing the value of the
currency to depreciate and the flow of trade to readjust. In 1995,
over $380 billion (380 G$) in U.S. currency was in circulation, two-
thirds of it overseas. As of April 2004, nearly $700 billion was in
circulation, with an estimated half to two-thirds of it still being
held overseas.


A few nations besides the United States use the U.S. dollar as their
official currency. Ecuador, El Salvador and East Timor all adopted the
currency independently; former members of the US-administered Trust
Territory of the Pacific Islands (namely Palau, the Federated States
of Micronesia and the Marshall Islands) decided that, despite their
independence, they wanted to keep the U.S. dollar as their official
currency. Additionally, local currencies of several states such as
Bermuda, the Bahamas, Panama and a few other states can be freely
exchanged at a 1:1 ratio for the U.S. dollar. Finally, a number of
nations have tied their currencies to the U.S. dollar – including
Argentina (1:1 fixed exchange rate from 1991 until 2002), Lebanon (one
dollar = 1500 Lebanese pound), Hong Kong (one U.S. dollar = HK$ 7.8
since 1983), and several more. A significant recent development is the
action of the People’s Republic of China: the renminbi had once been
informally and controversially pegged to the dollar (since the
mid-1990s, at 1 U.S. dollar = 8.28 Y); however the peg was removed on
July 21, 2005. Instead, China has a managed float against a basket of
(Have additions or corrections to this material? Email us at
info [at] gocurrency [dot] com)


World Abandoning the US Dollar as International Currency For Trade
BY Julian_DW_Phillips  /  Dec 01, 2007


The foreign exchange markets are not solely about exchange rates. They
are about values, smooth flowing of international trade, about trust
and reliability. The sight of the $ falling over a long period of
time, with bounces and recoveries that don’t change the downward trend
is far more than simply a drop in value!

The $ is steadily weakening, but more than a drop in the $’
international value is happening here. The loss of confidence is in
the $ is accelerating each time it slips one or more percent on a
persistent basis, with small short recoveries being seen in the midst
of this decline. How important is this loss of confidence? Critical
for it precedes policies, which long-term will lessen the role of the
$ to one of the world’s top 5 currencies.

Growing surplus holders don’t want to dump the $ for fear of losing
value in the remaining ones in their portfolio, but don’t think that a
dumping of the $ is what it will take to remove it from the position
of principal global currency. All realize that it is the knowledge of
the declining value of the $ that will bring on a major toppling of
that currency. So it is a choice of a steady ‘controlled’ fall or a
steep decline to disaster. To get perspective on the global scene what
is the thinking out there?

China & neighbors : – China’s premier, Wen Jiabao has expressed
concern at the decline in the $, of which they hold $1,430 billion
which total is growing by the day. He said it was becoming difficult
to manage these reserves, while their value was under unprecedented
pressure. China has stockpiled £700bn worth of foreign currency, and
has only to decide to slow its accumulation of the U.S.$ to weaken the
currency further. Yes, Europe is now its top customer so it is
acquiring the EURO at a rapid pace, but it has to lower the $’ presence
in their reserves. So, what can they do? All they can do is to speed
up the spending of them on assets, other currencies and whatever else
they can and as quickly as they can. The warning by the Premier was
reinforced by a Chinese central bank vice-director, Xu Jian, who said
the $ was “losing its status as the world currency”. Korea’s central
bank has urged shipbuilders to issue invoices in the local currency
and take precautions against the weakened $.

The Middle East : – Kuwait, which cited imported inflation as
the reason for its decision to drop the $ peg. The Dinar has gained
4.76% since the central bank switched to a currency basket. The Saudi
Riyal rose to a 20-year high after the Fed cut rates on Sept. 18 and
the Saudi Arabian Monetary Agency chose not to follow. This set off an
appreciation of the Riyal from the time just after al- Suwaidi
questioned of the United Arab Emirate’s currency peg to the $. Saudi
Arabia may be considering its first revaluation in 21 years to help
bridge a divide with oil-producing neighbors worried about their pegs
to the $. UAE Central Bank Governor Sultan Nasser al-Suweidi said last
week he was under growing social and economic pressure to follow
Kuwait’s lead, although he would only act in concert with Saudi Arabia
and three other states preparing for monetary union. Contracts to buy
12-months futures in the U.A.E. Dirham rose the most in at least 10
years this week after al-Suwaidi’s comments, to trade at a 2.5%
premium to the spot price.

Businesses are complaining about rising costs and migrant
construction workers rioted in Dubai this month to demand a pay rise
to compensate for savings lost due to the $’s slide. The U.A.E.
economy ministry said exchange-rate reform would be one of the ways of
containing inflation driven by the dollar’s slide, which was making
some imports more expensive. OPEC’s $6 billion development fund is
hedging its exposure to the weakening $, Director-GeneralSuleiman
Jasir al-Herbish said this week. Last month the central bank of Iraq,
four years after the United States invaded, stated that it wished to
diversify reserves from a reliance on the U.S. $.

Other O.P.E.C. nations : – Venezuela backed an Iranian proposal
to add the group’s concern over the falling $ to a summit declaration
to be made today. Saudi Arabian Foreign Minister Prince Saud Al-Faisal
said that no mention of the $ should be made in the declaration
because he didn’t want the U.S. currency to “collapse.” Nigerian
Finance Minister Shamsudeen Usman said last Friday that his country’s
laws has been changed to allow it to diversify its foreign reserves
out of the $. Angola may shift its international reserves away from
the $, Finance Minister Jose Pedro de Morais said. Angola has $10.2
billion of foreign-currency reserves. De Morais said around 80% of the
reserves are in the U.S.$. Three of the world’s big oil exporters,
Iran, Venezuela, and Russia, are demanding payment in the EURO rather
than in the $. Iran insisted that Japan should make all its payments
for oil in Yen, rather than in the $.

This list of important $-holding entities concerned about the $ and
one that’s getting longer by the day .

We are moving to the end of the U.S. $’s 62-year reign as the world’s
main international currency for trade, financial transactions and
central-bank reserves? Unless something is done to give real value to
the $, we believe that the process has to accelerate, rupturing the
global monetary system, only to bring back Protectionism in the large
trading blocs, exacerbating political and economic instability. We see
this rising wave of concern moving forward to a major crisis. Any
calming of the situation will cause a short-term strengthening of the
$ to be followed by steeper declines.

On the back of this, confidence in the precious metal markets,
particularly gold and silver, will climb as a counter to the decline
of the $.

Please subscribe to: for the entire report.

By Julian D. W. Phillips
Gold-Authentic Money

Julian Phillips – was receiving his qualifications to join the London
Stock Exchange. He was already deeply immersed in the currency turmoil
engulfing world in 1970 and the Institutional Gold Markets, and
writing for magazines such as “Accountancy” and the “International
Currency Review” He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether
it be trends, charts, reports or other factors that have bearing on
the price of gold, our aim is to enable you to understand and profit
from the Gold Market.

Disclaimer – This document is not and should not be construed as an
offer to sell or the solicitation of an offer to purchase or subscribe
for any investment. Gold-Authentic Money / Julian D. W. Phillips, have
based this document on information obtained from sources it believes
to be reliable but which it has not independently verified; Gold-
Authentic Money / Julian D. W. Phillips make no guarantee,
representation or warranty and accepts no responsibility or liability
as to its accuracy or completeness. Expressions of opinion are those
of Gold-Authentic Money / Julian D. W. Phillips only and are subject
to change without notice.


“Since 2003, International Currency Review has been investigating
hidden dimensions of global giga-corruption and Financial Warfare
issues that the ‘mainstream’ media routinely overlook but which
require exposure, given their serious implications for global

* Subscription Price: $600.00
* ISSN: 0020-6490
* First Published in: 1969

About the Editor, Author and Publisher: Christopher Story FRSA

Christopher E. H. Story FRSA, Managing and Operations Director, a
former occasional adviser to Lady Thatcher, has over 37 years’
experience of specialist intelligence and financial publishing. Mr
Story has testified on several occasions before US Congressional
Committees on international affairs issues. He is a very well-known
independent currency, economics, finance and current affairs
specialist, and is also a conference speaker on dimensions of the
World Revolution that are swamping and confusing the West.

Christopher Story is a veteran private investigative journalist and
publisher. Although we use the word ‘Intelligence’ for marketing
purposes on this website, this website (and all the publications that
Mr Story edits and publishes) are private ventures and have nothing to
do with any outside sponsorship, having no connection with any
intelligence service. Mr Story is NOT an agent of a foreign power, and
any allegations to the contrary are actionable for libel in the
English Court.

By extension, reports posted on this website and published in our
services, represent nothing more nor less than the honest results of
straightforward investigative journalism and enquiry. But the
unhealthy hegemony of intelligence communities worldwide has resulted
in excessive power being held in their hands, so that much
investigative journalism in today’s context is liable to clash with
the overbearing intelligence power. It is necessary at all times to
distinguish between legitimate journalistic investigation and the
operations of intelligence communities. The Editor’s assistance
towards Ambassador Leo Wanta, discussed in our Wantagate reports, was
undertaken as a pro bono measure given the miscarriage of justice
suffered by that great American patriot, and for no other reason.

Mr Story is now among the longest-serving editors of any publication
in the world, having edited and published International Currency
Review since quite shortly after it first appeared in 1969. This means
that his experience of geofinancial and global economic analysis is
virtually unparalleled. In addition, his exceptionally extensive
knowledge and understanding of ‘hidden’ intelligence operations,
policies and dimensions, derived from many years of deep analysis and
intelligence community contacts, enables him to elaborate and explain
financial, geopolitical and intelligence issues which ‘mainstream’
analysts may not understand, or even recognise to be issues requiring
investigation. This long experience, and his editorship since 1991 of
Soviet Analyst, enables Christopher Story to throw much penetrating
light on contemporary World Revolution developments otherwise
considered inaccessible or else irrelevant by ‘mainstream’
journalists. Indeed, few seem to realise that ‘there’s a Revolution
on’ at all.

You will have noticed many references to the World Revolution on these
websites. Didn’t you know that this is what we are all experiencing?
Who are the ‘dark actors playing games’ to which poor Dr Kelly, the
brilliant British microbiologist who was ‘suicided’ in 2003, referred
shortly before his death? Did you not know that certain over-powerful
intelligence services, protected by long-standing legislation that
they use as a cover for their open-ended organised criminal
activities, are in control, out of control and need urgently to be
brought under control, before they deal their suffocating death blow
to democracy?

Judge for yourself, and also on behalf of the organisation, business,
institution or corporation that you may represent, whether you need
the range of publications, books and services that Christopher Story’s
intelligence companies provide. Apply to join the worldwide community
that recognises the penetrating importance of his research and
published work, and of the excellence of our intelligence


Legal Notice

In the contemporary revolutionary environment – in which certain
organised criminalist communities, scamming networks, gangs, cadres
and individuals that may consider themselves to be permanently
protected by intelligence secrecy legislation and/or by their
occupation of high official positions, think they can get away with
very high crimes and misdemeanours on a scale without historical
precedent – the Fourth Estate has been extensively intimidated and
warned off from investigating any such official criminal operations.
When such parties or interests consider their operations to be
vulnerable to partial exposure, they are in the habit, like Chicago
gangsters, of issuing threats. The issuance of threats is a criminal
offence in the United Kingdom, but it is apparently not in the United
States – highlighting an interesting and important divergence between
our two cultures.

On 24th July 2003, the legal representative of a certain (innocent)
party wrote to the President of the United States, the Vice President
of the United States, the National Security Adviser and the Attorney
General of the United States, referring to Volume 28, Number 4 of the
International Currency Review, published in the Spring of 2004, which
contained preliminary details of certain international financial
operations, including certain dubious transactions. The letter
contained the following text:

“International Currency Review, Volume 28, Number 4, Spring/Summer
2003 with primary author being Mr Christopher Story. It should be
noted that every attempt has been made to advise the appropriate
parties that upon best information and belief financial contributions
to generate the referenced publication came from the DNC’.

DNC stands for Democratic National Committee. Thus it was alleged
inter alia directly to the President of the United States that the
issue of International Currency Review in question may have been
financed in part by the dialectical political opposition in the United
States. The context of this wild allegation is not elaborated here,
since the purpose of this notice is to make it apparent that we will
not tolerate libellous statements such as the implied libel contained
in this letter. The suggestion that we have accepted, and by
implication routinely accept, financial contributions in exchange for
publishing certain information, is libellous, inaccurate, spurious and
wholly without any foundation whatsoever. World Reports Limited and
the two other companies with which it is associated are independently
financed, stand-alone operations with no outside political,
intelligence or other affiliations of any kind. This has been the case
since we started in business in 1969, and any unwise suggestions to
the contrary are malevolent libels.

In November 2004, a British intermediary with ‘very close MI6
contacts’ conveyed the following spurious allegations to Christopher
Story. He stated that MI6 had alleged to the British media that Mr
Story was or is associated in some odd way with Sir Mark Thatcher, in
connection with the aborted Equatorial Guinea coup. This scurrilous
allegation is total make-believe and has no basis in fact. Mr Story
has never met Sir Mark Thatcher and has no connection with him or with
any of his alleged associates. He spends 100% of his time, with
others, preparing our intelligence titles for publication.

In the same month, it was separately alleged via a non-UK source that
Mr Story was in some mysterious way associated with a Mr Bernie
Ecclestone. a motor racing magnate with a colourful background, and
might be willing or able to contribute funds for a racing venture in
Monte Carlo. Christopher Story has no knowldge of, or interest in,
motor racing, has never met Mr Ecclestone, and has no time at all for
such frivolous matters. These pathetic tall stories are malevolent
inventions, and would be laughable if their underlying purpose were
not so manifestly evil, outrageous and scandalous. Bearing false
witness is among the very worst of the sins listed in the Ten

Upon investigation, Mr Story was able to establish that both these
allegations had been invented by MI6.

The UK-based intermediary was able to confirm this. He agreed that the
allegations had no basis in fact, but added threateningly words to the
following effect: ‘They don’t need to be accurate. All they need to do
is to give the false information out to the media, in the expectation
that they will accordingly pay no attention to anything you publish’.
In Volume 30, Numbers 2 and 3 of International Currency Review, the
Editor described these threats in detail in order to place them into
the public domain for current and any future reference. This Legal
Notice serves the same purpose.

It is hereby reiterated that in the event that the aforementioned
black, scurrilous libels, or similar or any further fabrications about
Christopher Story, his publications and/or his businesses, are ever
alluded to, repeated, elaborated or otherwise disseminated by any
print, broadcast or other medium, including via the Internet, anywhere
in the world, appropriately severe legal measures will be taken
against all those concerned, including any distributors of such
offensive materials, in the English Court and in any other
jurisdiction as appropriate, and that maximum damages for defamation
will be sought regardless of the circumstances of the perpetrators.

It is to be understood by all concerned that we will will not tolerate
such black pressure being exerted upon us by departments of dirty
tricks instructed by or associated with organisations or others whose
dubious activities may at any time be the subject of our necessarily
good faith, arms-length exposures and investigations in the interests
of the international financial community or any of our other
specialist readerships. In summary: any repetition or elaboration of
these lies and libels, and any new lies about or libels against us,
will be met with the appropriately vigorous legal responses.

Leave a Reply