Counterfeiting and American Monetary History

In the November 10, 2011 issue of the New York Review of Books, Gordon Wood, professor emeritus of history at Brown University, reviews a new book by Ben Tarnoff Moneymakers: The Wicked Lives and Surprising Adventures of Three Notorious Counterfeiters. I found the second paragraph of Wood’s essay, especially arresting.

Almost from the beginning of American history Americans have relied on paper money. Indeed, the Massachusetts Bay Colony in 1690 was the first government in the Western world to print paper currency in order to pay its debts. Although this paper money was not redeemable in specie, the Massachusetts government did accept it in payment for taxes. Because Americans were always severely short of gold and silver, the commercial benefits of such paper soon became obvious. Not only the thirteen British colonies, but following the Revolution the new states and the Continental Congress all came to rely on the printing of paper money to pay most of their bills. By the early nineteenth century hundreds of banks throughout the country were issuing notes that passed as money. No place in the world had more paper money flying about than did America. By the time the federal government began regulating the money supply during the Civil War, there were more than ten thousand different kinds of notes circulating in the United States.

Note the explicit reference to the role of making paper money acceptable in payment for taxes as condition for the success of the paper money printed by the Massachusetts government even though the money was not redeemable in specie.

Wood goes on to recount the important role that counterfeiters played in American history focusing on the stories of the three “heroes” of Tarnoff’s book to illustrate the ways in which counterfeiters actually served the public interest by providing access to paper money that banks were not willing or able to provide, an observation that will resonate deeply with our own esteemed Benjamin Cole, who has loudly proclaimed the benefits of monetary expansion, even if accomplished by counterfeiting.

Another important point that I found extremely interesting comes toward the end of Wood’s piece.

The golden age of American counterfeiting came to an end during the Civil War. In 1862 the United States made paper money printed by the national government legal tender. This “bold expansion of federal sovereignty,” says Tarnoff, “represented nothing less than a revolution in American finance.” The National Currency Act of 1863 followed, and a tax on the notes of state banks put them out of business. The United States had become a new nation. “The war produced something unimaginable: a federal monopoly on paper currency. . . .Never before in American history,” says Tarnoff, “had the power to make paper money been held by a single authority.”

Counterfeiter felt the effects immediately. With a single national currency people no longer had to sift through thousands of different bills trying to distinguish the genuine from the fake. But an agency to detect and arrest counterfeiters was still needed, and in 1865 the Treasury Department created the US Secret Service, which soon severely cut down the number of counterfeiters and counterfeit notes. At the time of the Civil War one third or more of the paper money in circulation had been fraudulent; by the time the Federal Reserve System was established in 1913, counterfeit bills made up less than on thousandth of one percent of the paper money supply.

Obviously, centralizing the issue of bank notes greatly increases the incentive of the monopoly issuer to enforce its property rights and eliminate counterfeiting. With a decentralized supply of bank notes, individual banks have relatively little incentive to seek or undertake enforcement action against counterfeiters who are more likely to counterfeit someone else’s notes than their own. In his first great book on monetary theory, Good and Bad Trade, Ralph Hawtrey cited the reduced costs of identifying counterfeit notes as the principal advantage in suppressing free competition in the issue of banknotes.

Wood closes by noting that most of the $900 billion of Federal Reserve Notes in circulation in 2010 (now well over $1 trillion) are thought to be held outside the US. The amount of gold held in bullion or coins by private citizens is estimated to be 16% of the total of gold in existence in2008. The current stock of gold in all forms is about 170,000 metric tons. So about 25,000 metric tons of gold may now be privately held. At $1700 an ounce, private gold holdings are thus worth about $1.3 trillion. I don’t know how much of this is held outside the US, but I suspect it is much more than a half. Let’s assume it’s a round number like $1 trillion. Then the amount of privately held gold outside the US is about twice the amount of privately held Federal Reserve notes. However, holding Federal Reserve Notes is not the only way that people can hold dollars abroad. They can also hold euro dollar accounts, which are time deposits denominated in dollars held in offshore (outside the US) banks. No one knows what the volume of such accounts is, because it is basically an unregulated market outside the reach of US regulatory authority and pretty much left unregulated by foreign governments. But estimates of the size of euro dollar accounts (which may be denominated in other currencies, but are overwhelmingly denominate in dollars) are probably far more than $1 trillion. So based on the revealed preferences of legally unconstrained choices, the dollar seems to be way, way more popular than gold.

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21 Responses to “Counterfeiting and American Monetary History”


  1. 1 Benjamin Cole February 15, 2012 at 12:20 pm

    I loved that story in NYROB when it came out, and recommended it to Money Illusion readers back then. I am delighted to see the highly intelligent and insightful David Glasner pick it up too. (Despite my criticisms, Glasner is one of my favorite bloggers, and if I lived in DC I would look him up).

    Paper money is a fascinating topic. The ability to create income, wealth and output by printing money is in many regards real.

    If people labor for that scrap of paper, then wealth is created. And they keep laboring as that scrap of paper is circulated. There is no denying this reality.

    This may be blasphemy to the Theo-Monetarists and Econo-Shamans, but it is reality.

    The moral issue for me is not debasement of currency (as long as inflation is kept in single digits), but who benefits from the created money? If I counterfeit, then I unfairly benefit, despite the benefit I bring to many, many others and my nation. It might be patriotic to counterfeit, but still unfair.

    It strikes me that QE is a good solution. By exchanging money for US bonds, we deleverage all taxpayers (including our wealthiest!), but bondholders are paid. There is no theft. The bondholders can spend their money or reinvest in equities or business start-ups, private-sector debt etc.

    The story line remains the same: The Fed should print a lot more money, soon and for a long time probably.

    Another top-knotch excellent post by David Glasner.

  2. 2 alternative investment February 15, 2012 at 2:38 pm

    Fascinating post. It really shows the relationship between paper money and the creation of real wealth. It also reminds me of the fact that whenever there is a crisis, investors from all over the world rush into the dollar, to the point where there is actually a shortage of dollars and the FED needs to extend lines of credit to foreign central banks.

  3. 3 Max February 15, 2012 at 5:43 pm

    Most dollars are in the form of treasury bonds. Currency is a poor choice for long term investment unless you have reason to fear confiscation of assets (e.g. Iran probably holds currency).

  4. 4 Mike Sproul February 16, 2012 at 10:11 am

    “With a single national currency people no longer had to sift through thousands of different bills trying to distinguish the genuine from the fake.”

    Don’t forget that the country had thousands of towns. Each town had only a few banks, so townspeople would only have to deal with notes issued by those few banks. In a time when people seldom traveled more than 20 miles from home, people would rarely have to deal with notes issued by distant banks. They would refuse to take out-of-town notes, just as people today refuse to take out-of-town checks.

  5. 5 Doc at the Radar Station February 16, 2012 at 5:49 pm

    Interesting! Wasn’t the post civil war period up until 1933 generally a deflationary period (even not counting the 1929 recession)? It seems that currency *integration* is disinflationary or deflationary and that currency fragmentation would tend to be inflationary…How did the gold standard work prior to 1863?

  6. 6 Will February 18, 2012 at 3:25 pm

    Hmm, so in a free banking system counterfeiting would be much easier? I think I’m starting to warm to free banking.

    I cannot help recalling that when I discovered this blog, I made a comment admiring the writing, and calling for massive counterfeiting. David replied,

    “writing is like any skill, you get better at it by doing it a lot and by working to improve. That probably goes for counterfeiting, too, but I would encourage you to work on the former not the latter.”

    I take it that David’s now come around to my side! And I’m heartened to know that Benjamin Cole is spreading the word too.

  7. 7 PrometheeFeu February 18, 2012 at 11:39 pm

    “Note the explicit reference to the role of making paper money acceptable in payment for taxes as condition for the success of the paper money printed by the Massachusetts government even though the money was not redeemable in specie.”

    I’m not sure why we have such complicated arguments as to what makes people use currency. What it comes down to is this: you have to be able to use the currency to get stuff you want. Whether it’s paying your taxes, gold or whatever, it doesn’t really matter. If the currency is successful, pretty soon you can start getting haircuts and tomatoes for it which is really what you want from currency anyways. I think the difference between gold-backed and fiat money is overstated. It’s not really fiat money if I know I can exchange it for a meal or the services of a doctor.

  8. 8 David Glasner February 19, 2012 at 7:52 pm

    Benjamin, Because you don’t give out your praise indiscriminately, you have not debased it, so I am pleased and honored to be on the receiving end. Even though I missed your comment on Scott’s blog about the NYRB piece, I was thinking about you when I read it and when I wrote the post about it, so you are obviously a force to be reckoned with.

    alternative investment, And in the summer of the 2008, two months before the crash, the dollar which had been depreciating against the euro and other currencies began to appreciate reflecting an increasing demand for dollars in a deteriorating economy. The Fed, rather than interpret the appreciation of the dollar as a sign of an impending crisis, complacently chose to regard it as a vote of confidence in the wisdom of its disastrously tight monetary policy.

    Max, Obviously, there are many different assets in which people choose to hold their wealth, each having particular characteristics. M2 is about close to $10 trillion, so it’s not at all clear what it means to say that most dollars are Treasury bonds.

    Mike, Good point, but I still think that increasing the number of issuers of bank notes increases the cost of detecting counterfeit notes and increases the incentive to issue counterfeit notes.

    Doc, The period from 1866 to 1896 was deflationary. Gold discoveries after 1890 caused mild inflation till World War I. The gold standard was effectively suspended at the start of World War I (that’s an oversimplification of course) and the gold standard was restored in the 1920s, but lasted for only 5 to 10 years until countries were forced off of gold by the Great Depression. The US was actually on a bi-metallic standard before the civil war and because silver was overvalued there was a de facto silver standard in the US before the Civil War.

    Will, I remember that exchange, but not the part about counterfeiting. What I probably meant was that the US Secret Service is pretty good at tracking down counterfeiters, so that it would not be a good career choice for you to pursue that line of work. I continue to prefer to see monetary expansion to take place through legal channels.

    Prometheefeu, The problem is why do people continue to assume that other people will continue to accept worthless pieces of paper for valuable goods and services. If people stopped believing that others would accept worthless pieces of paper they would no longer be acceptable. That expectation seems to be a more stable expectational equilibrium than the one in which people expect that the worthless pieces of paper will be accepted, which at some point must cease to be the case.

  9. 9 PrometheeFeu February 20, 2012 at 6:36 pm

    @David Glasner:

    I’m not sure one equilibrium is more stable than the other. There are probably more failed currencies than successful ones out there.

    Of course, we can then have a chat about the fact that eventually the universe will end and no-one will be left to accept our dollar bills. But I’m not sure when is the last time I made a decision based upon the end of the universe or the probably much more imminent end of the human race or even more imminent end of civilization. It’s not very rigorous, but I’m sure we could find something based on discount rates and uncertainty in the date of the aforementioned events.

  10. 10 David Glasner February 21, 2012 at 5:56 pm

    PrometheeFeu,

    You said:

    “I’m not sure one equilibrium is more stable than the other. There are probably more failed currencies than successful ones out there.”

    I think that’s what I was suggesting. The failed fiat currency seems to be the more stable (in a theoretical, not a practical sense) equilibrium than the successful fiat currency that retains its value over time. I agree that uncertainty about when the world will come to an end may be a way out of the dilemma, but it’s messy, and underscores the inherent precariousness of an equilibrium in which fiat money retains a positive value over time. Acceptability for discharging tax payments eliminates the theoretical anomaly.

  11. 11 PrometheeFeu February 22, 2012 at 7:19 am

    @David Glasner:

    But what’s the different between being able to pay taxes and being able to get food and shelter? I need to do one just as much as I need to do the other. And in both cases, currency is an absolute necessity. Sure, I could theoretically learn how to make my own food and become entirely self-sufficient, but in the process of doing so, I could also abandon all of my activities which create a tax liability. (It’s a lot less crazy than it sounds when I’ve already abandoned all trade for currency) In our highly specialized world, even many farmers would rapidly starve without access to currency and exchanges. FWIW, gold-convertibility is a lot less attractive given the relative necessity of gold vs food/not getting the IRS knocking at your door.

    And, the infinite regression from the end of the world also applies to government expenditures. Given that fact, why would the government accept currency to discharge tax payments given the fact that some day that currency will not be able to purchase anything?

  12. 12 David Glasner February 22, 2012 at 6:39 pm

    PrometheeFeu, The difference between the government accepting (or requiring) currency as payment for taxes is that by doing so the government guarantees a real demand for currency so that its value will not be expected to fall to zero.

  13. 13 PrometheeFeu February 22, 2012 at 9:03 pm

    @David Glasner:

    I’m just not sure what the difference is between the government and the private sector in this respect. Right now the only way for me (and I suspect yourself and most people in this country) to feed and house themselves is to use dollars. How does that not guarantee a real demand for currency?

    I guess my question is this: what is it that would make private actors stop accepting dollars but would not also make the government stop accepting dollars? The government does have different incentives, but they have no interest in collecting worthless taxes. And eventually, dollars will become worthless.

  14. 14 David Glasner February 23, 2012 at 8:23 am

    PrometheeFeu, You asked:

    “What is it that would make private actors stop accepting dollars but would not also make the government stop accepting dollars? The government does have different incentives, but they have no interest in collecting worthless taxes. And eventually, dollars will become worthless.”

    The government is issuing the worthless paper and derives seignorage and other advantages from its ability to issue currency. To create a non-monetary demand for its currency that is independent of its being accepted as money it requires that taxes be paid in terms of its currency. Even if that commitment might be revoked in the future, having the currency this year will keep you out of jail which is a real benefit independent of the currency’s acceptability as money by other transactors.

  15. 15 Mukesh May 21, 2012 at 2:27 am

    .so much to learn ! i lament not hanivg known about this years ago, think of all the education i could have passed on to my children . that is what has been lost to the current generations, education regarding the monetary system it’s fraud scamming to get everyone into debt. it’s as if the entire past century has been abnormal or a total fraud perpetrated on us ! please keep teaching / i truly love my lessons am grateful for the efforts . sincerely ..


  1. 1 The Dollar Is “Way, Way” More Popular Than Gold | Modern Monetary Realism Trackback on February 15, 2012 at 10:49 am
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About Me

David Glasner
Washington, DC

I am an economist at the Federal Trade Commission. Nothing that you read on this blog necessarily reflects the views of the FTC or the individual commissioners. Although I work at the FTC as an antitrust economist, most of my research and writing has been on monetary economics and policy and the history of monetary theory. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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