* When human groups amounted to no more than small tribes that had minimal interactions with each other, transactions between individuals could be conducted informally through personal trading. As big complex societies emerged, that became increasingly impractical, leading to the introduction of money, "units of exchange", for performing transactions as well. Money has evolved since then, guided by considerations of utility for both issuer and user, as well as security to prevent fraud.
* The ancestor of the monetary system is of course the barter system. A farmer could exchange his produce for the fish obtained by a fisherman or the cloth produced by a weaver. Even today, the barter system tends to come back into style in places suffering from social breakdown, or as an informal sideline activity in more harmonious lands.
However, dickering over the relative value of different things tends to be time-consuming and troublesome, and so societies tended to converge towards a common medium of exchange. Pacific islanders used cowrie shells; Aztecs used cacao beans, the main ingredient of chocolate, though it seems a bit unlikely that this was the origin of the modern term of "bean-counter" for an accountant; livestock was common among herding cultures; slaves were sometimes used, too, but they were much harder to control than cattle, and so not as popular; and many cultures used salt, including the Romans for a time, leading to the modern term "salary". Incidentally, after World War II cigarettes were used as a medium of exchange in many countries then in very poor condition, and penny candies have often been used to make small change in places with shaky currencies.
The medium that gradually gained widespread acceptance was precious metals such as gold and silver. Ancient Egypt was one of the first lands to establish transactions using precious metals, though their forms were variable -- rings, bars, wafers, and so on. Coins are said to have been invented by the Lydians, a people of Asia Minor, sometime after 640 BC, using stamped ingots of "electrum", a naturally-occurring amalgam of silver and gold. The scheme was refined by King Croesus, ruler of Lydia from 560 to 546 BCE, who introduced coins of true gold. He became identified with wealth in the antique expression "rich as Croesus".
Introduction of coinage was a great boost to commerce, simplifying transactions and allowing them to be conducted more rationally over long distances. The Greeks picked up the idea of coins from the Lydians; since the Greeks had a colonial and trading empire that ringed the Mediterranean, they spread their coinage, such as the "stater" and various multiples of the "drachma", along all the shores of the sea. When Alexander the Great engaged in a campaign of conquest in the 4th century BCE that took him to the borders of India, he kept his troops loyal by paying them in coin, and also helped spread the idea further.
The Roman Empire was built on silver and gold coins, as well as legions. The primary coins were the "aureus" and later the "solidus", which were mostly gold alloyed with some silver. As the empire expanded, the expenditures of the state led to the debasement of the coins, beginning with an act of the Emperor Nero in 64 CE. By the end of his reign, the silver content of Roman coins had shrunk to 90%. Other emperors followed his example, and over 200 years from the start of the process, the content shrank to 5%. The buying power of the currency fell accordingly.
The Byzantine Empire came up with a successor to the solidus known as the "nomisa" or "bezant", but it eventually was degraded into near worthlessness. By the end of the 7th century, a new coin named the "dinar" appeared and gradually became the predominant coin of the Middle East. By the time of the Renaissance, European states were producing new coins of their own, including the "ducat", "florin", "nobel", "grosh", "zloty", "guinea", and the Spanish "escudos" -- better known as the "dobloon". Others would follow.
Coins are still with us, though they are now little more than tokens made of non-precious metals. The US gave up minting silver dollars in 1935, and in 1965 eliminated silver in American coins completely, using copper plated with cupro-nickel. Few countries still use silver or gold coins as anything other than collector's items.
Ironically, even when non-precious metals are used, coins may be worth less than the metal they are made of. This has happened in India, resulting in a shortage of coins because they're bought up and then sold as scrap metal. The penny and other small-value coins have been gradually disappearing as they've become more expensive to make than the value they are supposed to represent; Britain, Canada, France, Israel, Spain, and other countries have abandoned the penny or its local equivalent. Typically, change is made by rounding off payments to the lowest-value surviving coin such as the nickel, though online and charge card payments are still billed to the exact cent.
The future of coins seems to be dim, but in a particularly imaginative rethinking of the technology, the American science-fiction writer Larry Niven once proposed that coins be made out of radioactive waste. He reasoned that this would solve the nuclear waste disposal problem, ensure that money circulated rapidly, and lend a new meaning to the old expression "money burning a hole in your pocket."
BACK_TO_TOP* Niven was of course joking. When the first paper money was introduced in China a millennium ago, many must have thought it was just as great a joke. Who would rest their fortunes in mere pieces of paper? It was too easily counterfeited, and who would think it would retain its value?
Kublai Khan, the Mongol emperor who ruled China in the 13th century, emphasized that it wasn't a joke when he decreed that those who refused to accept paper money would be executed -- and of course, imposed similar penalties on counterfeiting. He also confiscated all gold and silver, even that carried in by foreign visitors. This was the purpose of Chinese paper money: to ensure total state control over precious metals. It was effectively a totalitarian measure.
Chinese paper money did work well enough for a time; Marco Polo was impressed by the system during his visit to the Middle Kingdom. However, if there was a tendency to debase coins, the temptation to simply print more paper money regardless of the consequences was often irresistible, and public confidence in paper money was weak anyway. In 1294, paper money was forcibly introduced in Persia, but led to economic disaster. Even in China, paper money had been more or less abandoned by the 15th century.
In the meantime, the first modern banks had been evolving. Moneylending and similar activities were essentially as old as money itself, and there were banks in Roman times, but they were more or less local affairs. The idea of a formal bureaucratic organization that spanned borders to handle savings, investment, and loans didn't start in earnest until the 13th century. There were difficulties at first, with some early bankers burned at the stake, but by the 14th century Italian entrepreneurs were starting to make a go of the concept, the Medici family becoming the most famous of the lot. They used conventional metal currency, but conducted financial transactions using "bills of exchange" -- documents obtained at a given price that yielded a specific payment when presented.
For example, in 1317 the Italian banking firm of Peruzzi & Bardi arranged the transfer of the monies collected from the churches of England to the Pope in Italy. The London office of Peruzzi & Bardi obtained the coinage and sent a bill of exchange to Rome, which was then redeemed to the Pope in coinage by the Rome office of the bank. The money changed hands without having to be carted from England to Italy. Bills of exchange could also be transferred through many hands before they were redeemed. They weren't exactly paper money, being something more like a modern money order, but they were close to paper money, and did much to grease the wheels of commerce.
The Italian bankers also invented modern double-entry bookkeeping and the notion of a check -- a document that authorized the withdrawal of a specified amount of money to the bearer. The idea of a check was fairly obvious, but there was the perpetual threat of forgery, and it didn't become a reality until late in the 14th century, after adequate safeguards had been developed.
* The notion of paper money began to re-emerge in Europe at the end of the 17th century. According to tradition, the first European to introduce paper money was a Swedish banker named Johan Palmstruch, whose Stockholm Banco began to issue the stuff in 1661. The offering went well enough at first, but success led to the bank's overextension. Palmstruch, like any good modern banker, called to the government for financial help. Unlike a modern banker, he was taken to trial for mismanagement and sentenced to death, though the sentence was commuted to life imprisonment.
Despite the unhappy ending to Palmstruch's scheme, the idea was one whose time had come, and paper money was adopted by other European countries. One of the rationales behind the establishment of the Bank of England in 1694 was to issue banknotes, and it has been doing it ever since. The Bank of England, incidentally, wasn't a government bureaucracy, being instead founded as a private institution under a government charter; in 1844, it would be given an effectively monopolistic charter to issue bank notes. Other nations established such "central banks" to control the manufacture and distribution of currency.
* Generally, the original idea behind European paper money was to simply provide what amounted to a token that was redeemable in gold or silver. The paper was more convenient in many ways, and as long as it was regarded as equivalent to precious metals, users were confident in it.
There was, as always, a tendency to cheat. In 1716, a Scotsman named John Law persuaded the Duke of Orleans, then the French regent for the young Louis XV, to allow him to start a bank and issue paper currency. Law's bank, which was nationalized as the "Banque Royale" in 1718, was another roaring success, with Law using the bank to launch business ventures -- in particular, consolidating trading companies operating in French Louisiana into a single "Mississippi Company".
Thanks to Law's energetic promotion, the Mississippi Company became the target of wild stock-market speculation, with the activity requiring the issue of paper money from the Banque Royale. Unfortunately, a little accounting showed that the bank had issued twice as much paper money as there was gold and silver in France to back it up. The "Mississippi Bubble", as the speculative frenzy would later be named, finally burst in late 1720, with holders of the bank's notes rushing to redeem them for hard currency. The bank collapsed, with Law fleeing the country. France did not turn back to paper money until the 1790s, when the new revolutionary government began to issue "assignats", and this scheme went worse than Law's. Like many shaky governments, they simply printed more banknotes to cover their debts, ultimately driving the currency down into worthlessness.
The Americans showed an interest in paper money even before independence. The concept was heavily promoted by the enterprising Benjamin Franklin, polymath and one of the founders of the American Republic, whose popular journal POOR RICHARD'S ALMANAC gave him an influential forum for spreading his ideas. Printing currency was also a natural extension of his printing business, and he printed paper banknotes for the colony of Pennsylvania.
Many colonies enthusiastically printed their own currencies in the mid-18th century. As it turned out, they were too enthusiastic, and in 1764 the British Crown banned further issues of banknotes by the colonies. That was no doubt prudent, but it was also done in a high-handed fashion. In addition, the colonists had also been pushed to printing banknotes by Crown policies that worked to keep gold and silver in Britain, starving the colonies for currency so badly that Spanish coins were in widespread use among them. This is why America doesn't use the pound as the national currency; the colonials generally traded in "dollars", the English name for Spanish "reals", with both the English name and the Spanish coin derived from the Central European "thaler".
In any case, the issue of money was one of the thousand little cuts that drove the Americans, against their instincts, to revolt against Britain. The colonies declared themselves as independent states and printed money on their own again, as did the Continental Congress. They all proved just as undisciplined as they had been before, and the results were exactly the same. A popular phrase of the time, "not worth a Continental", described what the citizens thought of Continental banknotes. State-issued banknotes were almost as bad; after the revolution, the state of Rhode Island pursued such a reckless monetary policy that it became known as "Rogue Island".
Article 1 / Section 10 of the American Constitution established in 1789, providing a central Federal government above the squabbling states, expressly prohibited the states from printing their own money. That right was reserved for the Federal government -- though the first national mint wasn't opened until 1794, and currency wasn't issued until 1797.
The issue definitely did not include paper money, though it was progressive in adopting a "decimal" currency scheme, organized in nice neat multiples of ten. The idea had been pioneered by the Russians, but it was not widespread, other states generally retaining their more irregular systems. In Britain, for example, four farthings made a pence, 12 pence made a shilling, and 20 shillings made a pound. There was also a "guinea", which was a pound and a shilling. The British would more or less retain this scheme until 1971, when a pound became a hundred pence.
Incidentally, the motto on the first American pennies was "Mind Your Business", though this would make saying "a penny for your thoughts" a bit contradictory. There was a push to put George Washington's profile on the coins, but Washington himself, though instinctively methodical in cultivating his public image, had a very clear and disciplined idea of where to draw the line, and the independent Americans by and large thought the idea smelled of elitism and class distinction. Faces would not appear on any sort of American currency for a century.
American paper money did appear for a short time during the War of 1812 as an emergency measure, but it was abandoned as soon as possible. For decades after that, the only paper currency in the United States was issued by banks themselves. These commercial banknotes remain interesting collector's items, but at the time they were regarded with much suspicion, since they were used by many banks to put over frauds.
Both the North and South finally turned back to paper money during the Civil War. Confederate currency became one of the most notorious examples of a bogus currency in history. The South printed twice as much paper currency as the North, and Confederate money faded into extinction before the Confederacy did, suffering devaluation by a factor of almost a thousand. Of course, the restored Union did not recognize the currency of a rebel government as legitimate, and those Southerners who had piles of it found it little better than wallpaper.
Union "greenbacks" were issued beginning in 1862 by the Federal government through the "Legal Tender Act", pushed through by Treasury Secretary Salmon P. Chase because the government was effectively out of money. The banknotes were not redeemable on demand for gold or silver, but the government did state they would be redeemable at some unspecified time after the war. They were effectively something like zero-interest bonds. When all coinage began to become scarce in the North due to hoarding, Congress first authorized the use of postage stamps as "small change", but they proved impractical because they had to be kept dry. After issuing a special "postal currency" that didn't have glue on the back, in the fall of 1863 the Union began to print miniature banknotes in denominations that would ultimately range from 3 to 50 cents. They proved popular, and would continue to be issued into 1876.
The value of the Federal greenback declined steadily until late 1864, then rebounded since by that time it was obvious that the Union would win the war and presumably make good on its debts. By that time, Union greenbacks were also in fairly common use in the Confederacy, and after the war they would be retained as the popular currency of the reunited America. Ironically, in 1870 Salmon Chase, who had become Chief Justice of the Supreme Court, presided over a decision to declare greenbacks unconstitutional -- Chase had never liked the idea, and had only backed the Legal Tender Act out of dire necessity. President Ulysses Grant ignored the court, and thanks to two new justices placed by the president, within two years the decision had been reversed.
The US government finally announced in 1879 that greenbacks could be exchanged for gold, but relatively few people did so, since paper money had become well established and secure by that time. The disreputable commercial banknotes were long gone, having been killed off by a 10% tax passed in 1866 that made them uncompetitive.
There still was a hot debate over money policies, which figured prominently in presidential elections in the 1890s -- with a struggle between advocates and critics of "bimetalism", meaning notes backed by both gold and silver and not just gold, the bimetalists being in pursuit of loose monetary policy by expanding the money supply. There are suggestions that Frank L. Baum's fantasy novel WIZARD OF OZ, published in 1900, was at least partly intended as a satire or parable on the issue, with its references to yellow brick roads and green glasses. Although that might be a stretch, it should be noted that in the book Dorothy wore silver instead of ruby slippers; the moviemakers felt that Judy Garland would be more photogenic wearing ruby slippers. Expanded gold production rendered the bimetallic argument irrelevant, to become a historical curiosity.
It should also be noted that, although the US government established a central bank in 1791, it was allowed to lapse in 1811; with a second bank established in 1816, to lapse in its turn in 1836. The modern Federal Reserve System -- the "Fed", the central bank system -- wasn't established until 1913.
BACK_TO_TOP* By the early 20th century, paper currency was in widespread use all over the world. The failures in paper currency were not really due to the fact that the paper money wasn't adequately backed by gold or silver. Although many nations clung to the gold standard well into the 20th century, all money amounts to is a medium of exchange, allowing the citizens of a country to engage in transactions. The US finally completely abandoned the gold standard in 1971. All nations now use "fiat currencies" -- money which has no intrinsic value and is not backed by precious metals.
The problem with paper currencies was not that they were often inadequately backed by precious metals. What, actually, is money? It's nothing but a token of exchange, in effect a "universal IOU". Alice buys something from Bob, and gives him an IOU token that Bob can then use to buy something from Zelda. That does lead to the issue of how to index the value of the IOUs to the things being purchased, but in practice that's not such an issue -- prices being set by sellers according to perceived market value. If a seller asks too much for something, people don't buy it, particularly if a competitor offers it for a better price. The system has an inclination, if admittedly an imperfect one, towards self-stabilization.
The real issue is the supply of money. The money circulating in a society, in a sense, mirrors the material wealth of a country. It is relatively easy to print more banknotes, but not so easy to increase the overall material wealth of a nation, and so if twice the number of banknotes is printed given the same amount of wealth, the value of each banknote is more or less cut in half. That happened automatically, as if by magic, every time a government cheated on the system.
The most infamous example was the Wiemar Republic that ran post-World War I Germany, where inflation took place by a factor of trillions. It was actually done more or less deliberately, to reduce the burden of foreign war reparations payments, at the expense of wiping out the savings of the citizens. More recently, the African nation of Zimbabwe printed their currency into worthlessness, to finally establish the US dollar as the national currency. It seems this was done less as a deliberate plan, than out of simple indifference to the consequences.
Yes, in the days when paper money could be easily forged, it made sense to have a unit of exchange that a value in itself. However, the idea that there is an "inherent" value even to gold and silver is something of an illusion. A money supply based on precious metals is not absolutely more stable than one based on paper. When the Spaniards and Portuguese conquered much of what would become Latin America in the 16th century, they seized large quantities of gold and also obtained rich gold and silver mines, with the consequence that the value of their gold and silver currencies plunged to about a third of their original value. China -- its paper currencies floundering because of a lack of monetary policy, and an unfortunate tendency to overthrow currencies with each succession to the imperial throne -- grabbed on to silver imported by the Spanish from their New World colonies as currency, only to find it a temporary fix. In both cases, the end result was financial ruin.
Some astrogeologists have calculated the value of the metals in a single typical metallic asteroid; if some future generation were able to nudge one into orbit around the Earth and then render it down, the haul would be so huge that it would dramatically devalue every precious metal in circulation. Even without such a monstrous kick in the teeth, the price of gold tends to fluctuate drastically, dropping or rising relative to relatively stable fiat currencies.
Money, as the saying goes, "is worth what everyone thinks it's worth", and that rule applies just as much to gold as to paper bills. The real concern is discipline in the issue of money. If too much money is issued, it becomes devaluated. If too little is issued, it stifles commerce. Basing currency on precious metals like gold simply means currency that is very expensive to produce, and not very secure either; it only made sense in a time when paper money was trivially easy to forge. Indeed, gold is a depletable resource -- while it can't be destroyed, once in circulation it is gradually dispersed and lost -- and there's no way to keep mining more at reasonable cost to support a currency system. If we haven't already passed "peak gold" production, it won't be long before we do. In practice, it's not a great worry; nobody's proposing that as an incentive to go mine an asteroid.
Mainstream economists will admit that it may be harder to cheat with a gold standard, but point to its restrictiveness as a crippling flaw. Some accuse those who push the gold standard of simply trying to restore a system that would give them personal control over the money supply by hoarding gold. There is still a school of thought that believes money should at least have some hard currency backing, but it's well off the mainstream. In 1998, the highly respected US Federal Reserve Chairman Alan Greenspan commented: "I am one of the rare people who still has some nostalgic view about the old gold standard ... but I must tell you I am in a very small minority among my colleagues on that issue."
As for advocates of a strict gold standard, mainstream economists regard them as pushing "the economic equivalent of leeching", with the mindset of gold-standard fanatics derided as "gold buggery". It's an element of the fuzzy notion called "sound money" which, to the extent it has any substantial definition, means money value pegged to a specific commodity. That commodity may anything, not necessarily gold, with some sound-money advocates believing it should be pegged to a basket of commodities. Of course, in reality it's pegged to everything -- which is merely going full circle, and defining the value of money in terms of what it will buy.
Sound money is a notion popular among the lunatic fringe, who are obsessed with the idea that money should have a value unto itself. This mindset was parodied by the satirical ONION website in 2010 with an article titled: "US Economy Grinds To Halt As Nation Realizes Money Just A Symbolic, Mutually Shared Illusion" -- which led off by describing how the chairman of the Federal Reserve shocked the nation "into realizing that money is, in fact, just a meaningless and intangible social construct."
In any case, the actual amount of money printed is unsurprisingly a tricky issue, all the trickier in modern times since now maybe about 10% or less of all the money in prosperous countries is in the form of physical coins or banknotes, the rest existing only in the form of ledger entries in electronic accounting books. Not only are banknotes no longer backed by gold; the bulk of money isn't even backed by banknotes.
Control of the money supply does not really mean printing banknotes. Such control is performed by careful tweaking of interest rates to adjust the "price" of money; dictating what proportion of a commercial bank's deposits have to be held in government reserve banks; and buying or selling government securities. Stereotypically, confronted with inflation, a central bank will raise interest rates to tighten the money supply, with central bankers holding their breath and hoping they won't cause an economic recession. There is also a peculiar mechanism called "quantitative easing", in which funds are simply invented out of thin air and passed on to banks. That would seem inflationary, but it's only done as a countermeasure against deflation, and then very cautiously.
Even if most money is in the form of numbers in account statements, those numbers have to balance overall; no private citizen or commercial entity can legally "make up" new dollars by just inserting new values into an account statement. A government central bank can do so, however, using the "new" money to pay off debt; and in principle could also buy up securities to reduce the total amount of money in circulation. Since the primary job of a central bank is to prevent inflation, adjustment of the money supply is done very carefully, with the central bank chairman keeping a very close eye on statistics for inflation and national wealth, and making changes in monetary policy slowly and carefully.
BACK_TO_TOP* Money is still printed. One of the biggest landmarks in monetary history took place at the beginning of 2002, when twelve European countries conducted one of the largest exercises in public logistics in history: the introduction of the new euro currency, which replaced the national currencies of the group nations. Roughly 14 billion nice crisp new euro banknotes were printed and put into circulation, along with 50 billion shiny new coins, while old national currencies were phased out. Coins, incidentally, were based on the "cent", or a hundredth of a euro, with standardization on 1, 2, 5, 10, 20, and 50 cent coins, as well as 1 and 2 euro coins.
As for the euro banknotes, fans of banknote art found them dull. That was largely due to the fact that euro notes were distributed in twelve different countries that in many cases had long histories of intermittent mutual frictions, and so nothing that could cause offense was included on the notes. They not only didn't include any images of people, they didn't include any images of real scenes. Britain didn't sign up for the euro, mostly because the British didn't want to be subject to monetary policies made in Brussels, but the bland format of the euro notes also meant that the Queen would have to "lose her head". The fact that the Queen's image had only been on British banknotes since 1960 only highlighted the emotional nature of this complaint, but then emotions have figured prominently in the history of currency.
Within a few years, a certain backlash had set in against the euro, with advocates in some nations suggesting that it was a blunder and that the national currency be revived. A number of German localities came up with a more active response, making up their own currencies for use by citizens and businesses in the area. These local currencies were essentially promotional gimmicks, being convertible into euros and simply intended to boost local commerce. They were never intended to replace the euro, and were not generally recognized outside of the localities where they were issued.
The euro had further problems following the financial crisis that began in 2007 -- with the nations that had adopted the euro, the "eurozone", still remaining economically stagnant even after other regions began to recover. The euro became the target of considerable hostility, with the perception that the effect of adopting a common currency was to economically shackle prosperous nations in the eurozone to the poorer ones, to the benefit of neither. However, the controversy eventually went quiet, at least for the time being.
* If the reckless printing of paper is no longer a major problem, another problem that has shadowed paper currency since the beginning is still around, and in some ways is getting worse: counterfeiting.
The Bank of England conducted a strong crusade against forgers early in the 19th century, giving the public information on how to recognize bogus banknotes, and sending counterfeiters to the gallows. The bank was still unable to stamp out the practice, and later in the century a counterfeiter named Leon Warnerke raised it to an art form. Warnerke's origins were mysterious since he was a master at covering his tracks, and it is likely that the name Warnerke was just another one of his many aliases. He came out of Eastern Europe someplace, and became on the surface a photographer and a businessman in London, living a comfortable and seemingly respectable existence. In reality, he was a leader of sorts in a loose group of anarchists and other revolutionaries, a specialist in producing high-class forgeries of Eastern European currencies, particularly rubles. He was never caught up to his death in 1900. There is some suspicion that he even faked his death.
While producing high-quality banknotes is difficult, distributing them is a bigger problem. Governments tend to have better resources for doing this, and in fact governments have traditionally been the most ambitious and effective of forgers. The British produced large quantities of bogus assignats to undermine revolutionary France, and the Union helped the process of devaluation of Confederate paper money along by printing it themselves and sending it South. Oddly, one of the Union counterfeiters of rebel currency, Samuel C. Upham of Philadelphia, actually marked his banknotes as "facsimiles" in fine print along the margins, and marketed them through Yankee newspapers as "mementos". The practice of using counterfeiting as a weapon has continued to this day, being employed effectively against Saddam Hussein in the Gulf War, and even more recently against the Taliban in Afghanistan.
Arguably, the most professional campaign of forgery was conducted by the Germans in World War II. They had control of expert counterfeiters who had been imprisoned in the Sachsenhausen concentration camp, and even manufactured very convincing paper, which can be more difficult to forge than a banknote's appearance -- Warnerke, incidentally, was very good at manufacturing his own paper. The Bank of England managed to obtain some of the bogus German currency, and found the forgeries so good that it was said the only way in which they differed from the real thing was that the real thing wasn't as good.
* Given the long history of counterfeiting, of course officials involved in the introduction of the euro went to great lengths to protect the currency. Detailed images of the new banknotes weren't publicized until almost the last moment, and the police investigations of losses of pre-release euros were unusually energetic.
At the outset, the euro featured four layers of security. The first layer consisted of simple measures that were announced to the general public, such as watermarks and security threads. Incidentally, threading currency paper with special security threads is not new, having been done for over a century, though it has been enhanced by improved technology. The second layer was a set of seven or eight measures that were announced to about five million professional money handlers. The third layer was another set of features to help machines spot bogus banknotes. The fourth layer remains secret.
All such security measures are well and good, but unless a counterfeit is very badly done, most people will not have the training or tools to recognize it as one. Counterfeiters are usually careful to push banknotes in small quantities in places where the risk of detection is lowest -- poorly lit bars and pubs, for instance.
Since counterfeiting is an illegal activity, of course statistics on its extent are uncertain. Some estimates place the proportion of bogus currency in Western Europe at about 3%, but the ratio is much higher in less developed countries. The usual target is the $100 bill, and many of the forgeries are very good. North Korea has been known to push very high quality bogus $100 bills, and there is some suspicion that other "rogue" states such as Iran are engaged in their production. There have been suggestions that the USA simply give up on $50 and $100 bills to frustrate the counterfeiters, since law-abiding Americans usually don't deal in large-denomination bills, but that doesn't seem likely to happen any time soon.
Part of the reason counterfeiting is more troublesome than ever before is because it is now easier for small-time operators to pull off. All they have to do is get a high-resolution scanner and a high-end color printer, and a personal computer system becomes a home mint. The banknotes produced by such "casual counterfeiters" are of course easily recognizable as bogus by anyone with minimal training, but such forgeries are common enough to be a real nuisance.
Money makers have ways of fighting back. As mentioned, the right sort of paper is important for a good forgery, and one part of the security game is to ensure that such paper is very tightly controlled. The world's three most prominent manufacturers of papers for currency are Crane's, in Massachusetts; Portals in Hampshire, England; and Chamalieres, in the Auvergne. Chamalieres is owned by the De la Rue concern, which is the biggest printer of banknotes in the world, with clients around the world. Portals, which was acquired by De La Rue in the 1990s, has been providing paper to the Bank of England since 1742, and claims to have never had any paper stolen, though some nitpickers say it did happen once during the 19th century.
Other traditional schemes for protecting currency are to make the designs intricate, and use inking patterns that are hard to duplicate. US greenbacks, for example, were traditionally printed in two inks, green and black, with the two colors overlaid in very specific ways. Plastic notes, which may include features like transparent panels to make them very hard to copy, are now standard in Australia, New Zealand, and Romania; dozens of other countries have introduced them on a more limited basis. It is still possible to forge plastic notes, and in some countries, citizens simply do not like them.
Still another approach is to come up with new designs frequently. The lifetime of the average banknote pattern used to be about 15 or 20 years, but now it's changed every decade in most countries. The Americans have been traditionally stodgy in this regard, with modern dollar patterns from 1929 persisting to the end of the century, but even they have been forced to compromise and produce variations on old patterns to deal with counterfeiters, rearranging the layout of the bills and then introducing bills in "rainbow" colors.
* Although counterfeiting is as old as money itself, "money laundering", or the processing of money obtained from illegal sources to conceal its origins, is a relatively modern concept. Investigators like to "follow the money" and that was more difficult in the days when transactions were performed in cash.
Modern efforts to deal with crime and particularly terrorist networks have led to a race between law enforcement and money launderers. So far the launderers seem to be winning. There are a number of countries that have little bank regulation but good privacy and secrecy laws, making banks established in these countries ideal conduits for launderers. International pressure to make such banks more transparent has made only limited progress.
To add to the headache, unsurprisingly gangsters and terrorists have developed tricks to make the lives of financial investigators more difficult. One is the "starburst", in which a bank receives a large deposit of dirty money and then automatically distributes that money in small parcels to many different accounts in different locations, as per the instructions of the depositor. Another is the "boomerang", in which the money is sent on a long, circuitous trip through different accounts around the world, many of which may be "black holes" in countries where investigating finances is difficult, to ultimately end up back in the account where it started.
Terrorist finances can be even trickier to deal with than gangster finances. In the first place, the money may not be visibly "dirty" at all; modern Islamic terrorists have been able to obtain funding from wealthy individuals or charitable organizations. The money will remain "clean" until it is used in a terrorist attack. There has been a general crackdown on Islamic charities and intelligence organizations have been paying much closer attention to them, so it appears that this path for funding has essentially dried up.
Terrorists often tend to rely on cash, since it is difficult to trace, and have a long tradition of obtaining that cash through robbery or other crimes. Josef Stalin reputedly started out as a bank robber for the Communist Party. Small sums of cash may be parceled out to sympathizers, who stash them away in private bank accounts for use by the network on demand; and the reliance of modern Islamic terrorists on low-tech methods means that they don't have to store large piles of cash.
Islamic terrorists also have an ace in the hole in the form of hawala, an ancient Middle Eastern financial practice in which one banker hands out money on a verbal assurance that money has been deposited someplace else, where he may get his hands on it when he needs it. Although dealings in the Middle East are not noted for their extreme honesty, the integrity of hawala is enforced by long tradition, and it is both scrupulous and hard to trace.
BACK_TO_TOP* As a footnote to the issue of paper money, "sales coupons" and "loyalty rewards", are a sort of medium of commercial exchange, and can be regarded as a limited sort of money. A coupon is a chit that provides a discount or rebate, usually on a specific product or service, the coupons being distributed as a sales promotion. They may offer a simple discount on a product, but more generally they give a discount for a multiple buy -- for example, a "three-for-two" coupon means that if two of a product is purchased, a third one is thrown in, free.
The history of sales coupons is unsurprisingly obscure, but the first recorded, recognizably modern, sales coupon promotion was conducted by the American soft-drink company Coca-Cola from the early 1890s, with coupons for a free Coca-Cola mailed to potential customers or included in magazines. Vendors were provided with free Coca-Cola syrup to cover the giveaways. In 1909 CW Post, maker of breakfast cereals, began to offer coupons for a discount on purchase of a box of cereal. The idea didn't really take off until the 1930s, when everyone was short of money, with manufacturers and vendors trying to find better ways to push product. Although prosperity returned to the US after World War II, coupon use continued to expand, as the new supermarket chains adopted them as a standard practice.
Loyalty rewards traditionally involved a chit provided with the sale of a product; chits could be accumulated and then redeemed, usually for a specific product or products. They actually go back to the late 18th century, being generally popular in the 19th century. From 1896, the Sperry & Hutchinson Company of Jackson, Michigan, began printing what became known as "S&H Green Stamps" that were handed out by a range of vendors, being redeemable for products out of a catalog. There were other variations on the concept, most notably use of cereal or other box tops, as well as tickets in packs of cigarettes, as chits that could be redeemed for a prize.
In recent decades, they have evolved into more sophisticated programs, such as the "frequent flier" miles awarded to airline passengers, as well as comparable programs for hotel guests. Such programs do not involve chits, of course, with users being given an account that tracks their loyalty points.
Coupons and loyalty chits have traditionally been gimmicks, sometimes luring the incautious into spending more than they would have without the coupons, the loyalty reward catalogs being loaded with cheap and chintzy goods. There's never been much problem with forgery of coupons or loyalty chits, since few would see it as worthwhile to bother, though it seems it has happened. Coupons are still around in a big way, providing billions of dollars worth of discounts each year. They are increasingly purely digital in form, selected using a smartphone app, and then charged off automatically at the store checkout -- but that's getting a little ahead of the story.
BACK_TO_TOP
