Counterfeiting

Counterfeiting of money weakens the foundation of a financial system by devaluing its currency. Counterfeiting products causes loss of profits, damage to a brand, and possible injury to unwitting consumers.

Counterfeiting of currency has very deep roots. Coinage was the only form of currency issued by governments for most of history. The early European Americans relied on coins rather than paper money, with Spanish, French, and British coins circulating widely until U.S. coinage became common. Coins could be reproduced with less valuable metals, but such forgery required some skill with metalworking and was apparently not common.Counterfeiting

Historical Background

Paper money is much easier to counterfeit, but it was not widely used in the United States until the end of the eighteenth century. By 1750, most of the North American colonies had experimented with forms of paper Currency;counterfeitingcurrency, but there was little in America that resembled the wide array of banknotes then available in Europe. Business in the colonies was conducted largely by credit in the forms of bills of exchange. Essentially, these were promissory notes in which one merchant pledged to pay another an agreed-upon sum on demand. Bills of exchange, easy to counterfeit, circulated much as paper money does. Despite harsh laws against counterfeiting, few counterfeiters were caught, because few government officials were looking for them. In 1775, the Continental Congress began issuing paper money, known as Continentals, but it did not take any procedures to protect the currency against counterfeiters. In 1792, the U.S. Congress passed the Mint Act, which established the coinage system and the dollar as the principal unit of currency. Without an agency dedicated to protecting the currency, counterfeiting remained a problem.

The federal government did not print paper money until 1861, despite a nationwide demand for such easy-to-transport currency. The government would occasionally issue Treasury notes during periods of financial stress, such as the War of 1812, the Mexican War, and the Panic of 1857. The federal government did not regulate the regional banks that did issue paper money in an effort to assist traders. This lack of federal interest in paper currency created a nation of counterfeiters, as it became next to impossible to distinguish legally produced paper money from illegally produced paper money.

The huge variety of banknotes, such as these six, printed by the Confederacy during the Civil War made counterfeiting easy.

(Library of Congress)

Paper money is far more difficult to protect against forgers than is coinage. By the 1850’s, more than ten thousand types of cheaply printed paper money were used legally in the United States. Unlike modern currency, this paper money was not printed on specially marked paper with specially designed inks and patterns. As a result, counterfeiters had a field day. The U.S. Treasury estimates that one-third of paper money in circulation in 1860 was counterfeit. This situation threatened to spark inflation by devaluing the currency. The chaos did not end until 1861, when Congress attempted to finance the U.S. Civil War, U.S.;currencyCivil War by passing legislation permitting the Treasury to issue and circulate paper money.

From 1863 to 1929, the federal government again permitted thousands of banks to issue their own paper currency under the National Banks Acts. This money, known as national banknotes, was produced on paper authorized by the U.S. government and carried the same basic design, thus supposedly reducing the risk of counterfeiting. However, this currency was counterfeited so widely that Congress established the U.S. Secret Service, U.S.Secret Service in 1865 to put a stop to the counterfeiting. The Secret Service largely succeeded, and counterfeiting dropped dramatically.

Modern Technology

The emergence of high-quality laser printers and color photocopying during the late twentieth century aggravated the problem of counterfeit paper money, as it has become much easier to reproduce a bill with an altered denomination or to create an entirely counterfeit piece of currency in vast quantities. However, distinct differences usually remain. In genuine currency, the details of the designs are sharper with a clear background. Counterfeit currency often has blurred borders, shaded backgrounds, and fuzzy designs, as well as red and blue marks on the surface of the paper. Genuine currency has red and blue fiber as part of the paper itself. Most counterfeit coins in the modern era are produced to imitate rare objects and fool coin collectors. The most common changes in counterfeit coins are the removal, addition, or alteration of the coin’s date or mint marks.

Counterfeit goods are more complicated to combat than is counterfeit currency, partly because of the worldwide scale of the problem. By the millennium, the counterfeiting of American goods had become a major concern of businesses ranging from clothing designers to film studios. Some of the “knockoffs” were sold so cheaply and under such circumstances that consumers could reasonably be expected to know that they were purchasing counterfeits. Other consumers, such as those purchasing pharmaceutical products on the Internet, were unaware. Counterfeit products have proven costly to manufacturers, who lose both profits and reputations for quality and, perhaps, exclusiveness.

Counterfeiting Summary