A Counterfeiter's Paradise (35 page)

Wood’s aggressive leadership laid the foundation for this dramatic decline. With the Secret Service safeguarding the nation’s currency, counterfeiting lost its allure. It was no longer “an easy Way of getting Money,” as Owen Sullivan once called it. Now a counterfeiter didn’t know whom to trust: his closest associates could be government informants. If captured, he faced prosecution in a federal court and an average of eight to fifteen years in prison. The risks simply weren’t worth it. While a few continued forging on a small scale, the national counterfeiting industry crumbled under the force of the federal assault.

Counterfeiting was a casualty of the Civil War, a victim of the federal consolidation of power undertaken by the North to preserve the Union. Before the war, Washington was a distant, barely perceptible presence in most Americans’ lives. Afterward, people felt its power everywhere. Casting off the constraints imposed by Andrew Jackson and his disciples, the federal government thrust itself into the economic arena, becoming indispensable to everyday commerce. The pieces of paper printed under Washington’s exclusive authority gave America’s citizens a shared medium of exchange, uniting the currency as the war united the country. It was a belated victory for Alexander Hamilton and Nicholas Biddle, who had fought valiantly on behalf of their respective banks but never succeeded
in fully nationalizing the money supply. The war accomplished what they couldn’t. Energized by a strong national currency, the country embarked on a period of massive economic growth, rapidly maturing into the industrial powerhouse that Samuel Upham and millions of others saw on display at the 1876 Centennial Exhibition in Philadelphia.

The national notes were more than money. They were symbols of a new kind of nationhood, a common identity that transcended regional loyalties. People came to depend on their central government like never before, trusting Washington to regulate the country’s currency and secure its value. In 1881, the Secret Service confiscated toy money from various firms in Manhattan, claiming the merchandise too closely resembled genuine bills. “Securities and Coins of all countries should be held sacred,” the agency’s chief declared. “[P]eople, especially manufacturers, should not seek to transform them into curiosities.” As the one true moneymaker, the federal government would no longer tolerate even the slightest form of disrespect. Its notes had become sacrosanct, tokens of the nation-state’s power to metamorphose slips of paper into money.

T
HE DECLINE OF THE AMERICAN COUNTERFEITER
meant the end of a special kind of criminal. There would always be swindlers and cheats, new scams and hustles. But counterfeiters were different—they had played a leading role in America’s long, fraught love affair with paper money. In a country where everyone wanted cash, they made it; they extracted wealth from thin air in a nation that had always lived beyond its means.

Paper currency first appeared on the continent in 1690, when Massachusetts printed bills of credit to fund a failed campaign to take Quebec from the French. The colony didn’t have enough coin to pay the returning soldiers, so the legislature paid them in notes it promised to retire with future taxes. Soon bills of credit spread to other colonies, where they facilitated trade and financed more wars with the French. By the time the Revolution began, paper money had become a fixture of American life.

By postponing the present in anticipation of the future, paper promises helped America grow. No one could have expected the thirteen Atlantic colonies to become a united continental power stretching to the Pacific coast. It took a leap of faith, and a cascade of paper credit. The notes came not only from authorized sources—governments and banks, among
others—but also from counterfeiters. If counterfeiters didn’t intend to honor the promises printed on their bills, neither did many legal producers of money, who rarely had enough coin to back their paper. Counterfeiters acted as shadow financiers, contributing a significant portion of America’s money supply. While they adapted to changing circumstances over the years, the core of their business remained intact: a persistent appetite for cash in a country that never seemed to have enough.

Owen Sullivan, David Lewis, and Samuel Upham each lived through very different eras, yet all three built their fortunes on America’s addiction to paper money. Their careers mirrored the evolving confidence game of American capitalism, a machine that ran on various kinds of debt and deception, oscillating between manic exuberance and total collapse. In the decades after the Civil War, the rise of the Secret Service made the country’s counterfeiters an endangered species. But the moneymaking mentality had so thoroughly suffused America’s financial soul that even as counterfeiting declined, the spirit of Sullivan, Lewis, and Upham lived on. It could be seen on the trading floors where speculators bet money they didn’t have on a mercurial stock market; it pervaded an economy where people piled up imaginary riches on precarious pyramids of debt.

While the federal government emerged from the Civil War with a stronger hand over the economy, national money and national banks wouldn’t be enough to tame the country’s financial madness. Panics still struck with relentless regularity: in 1873, 1884, 1890, 1893, and 1903. In 1907, an unsuccessful ploy by a Brooklyn-born mining tycoon to corner the stock of a copper company precipitated yet another crisis. The financier J. P. Morgan intervened, spearheading a bailout of struggling bankers and brokers that prevented the disaster from escalating—but not before the extent of the damage persuaded people that a more permanent solution to the problem needed to be found. In response, Congress created a commission to investigate the country’s banking and currency laws. The
group’s findings ultimately led to the founding of America’s first central bank since the fall of the Second Bank of the United States in 1836: the Federal Reserve, established by Congress in 1913. It consisted of twelve regional reserve banks, overseen from Washington by a six-person board. All national banks were required to join the system, and any state bank had the option to become a member.

The architects of the Federal Reserve hoped to avert future financial disasters by providing the economy with a lender of last resort, as Morgan had done during the Panic of 1907. They spoke of a lack of “elasticity” in the nation’s currency—when demand for cash soared during a panic, the money supply couldn’t grow to meet the need for liquidity. The Fed addressed this dilemma by giving the government a valve for regulating the flow of money into the economy. If the country required more currency, the Fed could lower the interest rate at which it lent money, easing credit by encouraging member banks to borrow. If it wanted to shrink the amount of currency in circulation, the Fed could raise the interest rate, curbing the growth of the money supply by making credit more expensive.

The formation of a central bank fortified federal control of America’s money, accelerating the Hamiltonian trend put in motion by the Civil War. Even with the government taking a more active role, however, booms and busts persisted. Sixteen years after the creation of the Federal Reserve, the country suffered its worst financial meltdown in history: the crash of 1929, followed by the Great Depression. Like the Panic of 1907, the cataclysm prompted an overhaul of America’s financial institutions. It also inaugurated a new chapter in the centuries-old saga surrounding the relationship between paper money and precious metals.

The United States had officially adopted the gold standard in 1900, after decades of furious wrangling over the currency regime inherited from the Civil War. Beginning in the 1870s, a populist coalition of workers and farmers urged the government to print more legal tender greenbacks,
called United States Notes, without exchanging the bills for gold. They wanted an inflationary currency, which would devalue their debts and make cash more widely available. Their hopes were defeated when the government capped the quantity of greenbacks in circulation and, in 1879, made the notes freely convertible into gold. A new kind of federal currency appeared in 1914—Federal Reserve Notes—and these, too, were redeemable in gold, payable on demand at any reserve bank.

The Depression severed this link between the paper dollar and coin. Soon after assuming office in March 1933, President Franklin D. Roo-sevelt effectively took the nation off the gold standard, hoping to boost the price of American goods by driving down the dollar’s value. The government withdrew gold from circulation, nationalized the country’s gold reserves, and halted the convertibility of most federal money into precious metals. Roosevelt’s radical move marked an important first step in the gradual transformation of the dollar into a purely faith-based currency. The deathblow came in 1971, when President Richard M. Nixon finished off the gold standard by closing the “gold window” that enabled foreign governments to exchange dollars for gold through the Treasury. Almost three hundred years since its first appearance in colonial Massachusetts, paper money had permanently liberated itself from precious metals. The worst fears of Thomas Hutchinson, Thomas Paine, and generations of hard-money Americans had been realized.

By 1971, the government had stopped printing greenbacks and national banknotes. Only Federal Reserve Notes remained, which are still the only paper dollars in use today. In the twentieth century, they spread throughout the world, taking on the role that gold had served for centuries: a secure store of value in countries where the domestic currency is too volatile to be trusted. Most Federal Reserve Notes are now held overseas—about $450 billion by the end of 2005, as much as 60 percent of the total amount in circulation.

As the dollar has become global, so has the counterfeiting of American currency. For decades, Colombia produced most of the fake money coming into the United States, supplying up to 70 percent of the counterfeit bills passed every year. A crackdown begun in the late 1990s by the Secret Service and the Colombian government brought this number down to 5 percent, but moneymaking hubs have sprung up elsewhere—notably Peru, which is now the region’s major producer of counterfeit American cash. Like drug traffickers, Latin American counterfeiters have built underground networks for smuggling their product into the United States. While these bills are capable of fooling most people, experts can easily identify them as forgeries.

The most deceptive counterfeits on the market come from North Korea, whose government covertly forges American bills and then launders or wholesales them abroad. Printed with highly sophisticated intaglio presses—most likely at a secret factory about twenty miles from Pyongyang, the capital—the North Korean fakes are so difficult to detect they are known as supernotes. While North Korea officially denies involvement, the American government has openly accused the regime of counterfeiting, and continues to use both law enforcement and diplomacy to combat the spread of the supernotes. Nonetheless, the volume of supernotes in circulation is relatively small: about $45 million, according to a recent government estimate, not nearly enough to pose a serious threat to the American economy.

Overall, counterfeit currency accounts for a minuscule amount of the money in circulation: approximately one per ten thousand notes, both at home and abroad. This is partly due to the Secret Service, which pro-jects a sizable international presence through its many overseas offices. But American money has also become much harder to forge. Today’s printers embed notes with high-tech components that are considerably more effective at foiling counterfeiters than the complex leaf patterns Benjamin
Franklin used to deter colonial forgers. The new designs for Federal Reserve Notes introduced in 1996 include a security thread that glows in ultraviolet light and a special kind of ink that changes colors when viewed from different angles. The next generation of the $100 bill will feature another cutting-edge anticounterfeiting device: a strip composed of thousands of small lenses, which display three-dimensional images that change from bells to 100s as the viewer moves the note. A similar motion makes a larger bell to the right of the strip appear to vanish within a copper inkwell.

As the gadgets the government uses to secure the national currency improve, counterfeiting will become more expensive and time-consuming. Only those with the resources to devote to such an undertaking will be able to continue producing passable fakes, employing expert technicians who bear little resemblance to the charismatic engravers of counterfeiting’s golden age. Forging notes may even become obsolete, as criminals turn to more profitable swindles.

Perhaps the largest threat to counterfeiting is the uncertain future of paper money itself. In the twentieth century, paper definitively displaced precious metals; in Thomas Paine’s words, “an apparition” took “the place of a man,” an outcome he had warned against a decade after the Declaration of Independence. In this century, paper is being displaced by something even more ethereal. As financial institutions have grown more global and more intricate, money has become ghostlier than Paine could have imagined: traded as intangible signals, beams of light coursing through the filaments of the world’s data network. With new technology come new ways to get rich quick, new schemes for creating wealth by cultivating confidence.

The counterfeiters from America’s past understood the power of confidence better than anyone. They manufactured money backed by nothing but belief, using craftsmanship and charisma to earn their victims’ trust. Today, their legacy can be felt on Wall Street, where people wield complex financial instruments like magic wands, spinning false fortunes out
of the ether of global capitalism. These modern moneymakers probably don’t realize they belong to an ancient American tradition—that centuries ago, their forefathers hunched over copperplates with inky fingers, trying to instill inanimate paper with the spark of faith that sustains the nation’s economy to this day.

The idea for this book came from Stephen Mihm’s fascinating history of American counterfeiting,
A Nation of Counterfeiters:
Capitalists, Con Men, and the Making of the United States
. After reading it I called Stephen, who graciously took the time to speak with me. Our conversation made me want to read everything I could find on the topic, and set in motion the research that eventually produced a book proposal. Without him, this book wouldn’t have been written. At the time, I was working at a magazine called
Lapham’s Quarterly
, helping to put together an issue about the history of money. It was a wonderful way to begin learning about America’s financial past, and I’m grateful to the editor, Lewis Lapham, for letting me take part in such a worthwhile project.