Counterfeiting has been called the new weapon of mass destruction.1 But in reality, it has a long history in government arsenals, chiefly because of the economic consequences stemming from a loss in confidence in money. The first known case of government-sponsored counterfeiting in wartime is ascribed by Herodotus, the ancient Greek historian, to Polycrates, the tyrant of Samos in the Aegean. In 524 BCE, he bribed attacking Spartans to spare his capital, using lead coins covered with a gold wash.
In 1776, General Sir William Howe, the British military governor of New York, embarked on a counterfeiting campaign aimed at disrupting the economies of the rebelling American colonies. His actions were supported by a court ruling stating that “to depreciate the credit of an enemy by forging its paper money was a moral act.”2 Bogus paper notes were apparently printed by British loyalists in New York and Pennsylvania, as well as being produced in the United Kingdom.3 The over-issuance of notes, called “continentals,” combined with widespread counterfeiting, led to high inflation and a temporary loss of confidence in the paper currency of the breakaway colonies.
The British government subsequently counterfeited assignats, the paper currency of revolutionary France, during the 1790s. Up to 400 workmen printed bogus assignats in London, using paper manufactured in the north of England, under commission from the British government. Bogus notes were later sent to Europe with the British forces under the command of the Duke of York.4 French royalists in the Vendée region of France also counterfeited assignats with the support of the British government.5 As in revolutionary America, widespread counterfeiting exacerbated the massive overproduction of assignats by the French government, leading to a collapse in the value of the French currency.
United States, Continental currency, $2, 1776. Made nearly worthless, partly as the result of counterfeiting by the British, these notes, issued by the new Continental Congress, became known as “shinplasters” because soldiers used them to line their boots.
(National Currency Collection)
France later got a measure of revenge. Joseph Fouché, Napoleon’s infamous chief of internal security, is reported to have used secret agents to counterfeit and circulate bogus pound notes in neutral countries and in parts of England.6 Napoleon is also believed to have counterfeited Austrian and Russian paper money.7
Economic warfare was also widely employed during the twentieth century. There is considerable circumstantial evidence that the British government counterfeited imperial German marks during the First World War.8 In his memoirs, Herbert de Fraine, head of the Bank of England’s bank-note printing department during the war, cryptically refers to top secret naval intelligence operations that involved the central bank providing “imitations—in plain English, forgeries—of certain German documents.”9 He does not elaborate as to the precise nature of the documents, but notes that the operations were so confidential that only three people at the Bank were aware of them, and that all waste paper was burned and the ashes “scrupulously examined.”10 The forgeries were delivered in “ordinary wine-cases” to “Room 40” at the Admiralty and handed over to a Captain Hall (later Admiral), director of naval intelligence. Much later, de Fraine discovered that “Room 40 was the headquarters of a worldwide network of agents.”11 Possible Allied forgeries of German bank notes surfaced in stamp and bank-note auctions during the 1980s.12
This new French currency was widely counterfeited by the British and by French royalist allies.
(National Currency Collection)
Imperial Bank of Canada, $100, 1917. The note allegedly counterfeited by the Russians.
(National Currency Collection)
The Soviet Union is also said to have counterfeited Western currencies during the 1920s in an effort to destabilize the capitalist economy.13 In 1925, The Globe newspaper reported that $500,000 of forged $100 Imperial Bank of Canada notes had been discovered and traced to “Moscow Reds.”14 The notes were allegedly “manufactured as part of a Communistic plot to upset international currency” in a factory operated by Russian communists in Persia (modern Iran) and found their way to the London branch of the Imperial Bank of Canada via a Persian bank before being shipped to Canada for redemption. Some notes were also sent to England by the Russian State Bank. The forgeries were said to have been “executed with consummate skill, defying detection by ordinary experts.” A senior representative of the Imperial Bank of Canada stated that only a few of the bogus bills had been passed in Canada and that the bank would quickly withdraw that particular issue from circulation.15 A few weeks later, The Globe reported that the Russian State Bank, in an apparent tit-for-tat retaliation, had “issued orders against the acceptance of Canadian paper dollars by any of its branches.”16 The Soviet authorities alleged that thousands of dollars’ worth of counterfeit Canadian notes, supposedly made in Montreal, were circulating in the Soviet Union and that all Canadian paper money was regarded “with suspicion.” The Russian counterclaim defies plausibility, since few Soviet citizens would have had access to Canadian currency.
The most ambitious wartime counterfeiting campaign was that undertaken by Nazi Germany during the Second World War.17 In what became known as Operation Bernhard, Jewish forced labour counterfeited British pounds in the Sachsenhausen concentration camp north of Berlin. The operation began in 1941, and top-quality notes were being produced by late 1942. In total, some 9 million notes, with a face value close to £134 million were manufactured in denominations from £5 to £50, equivalent to 10 per cent of Britain’s 1943 money supply.18
The unit later began to forge U.S. dollars, but production was delayed owing to resistance by the Jewish workers. Before the notes could be produced in quantity, the camp was evacuated in early 1945. Based on the memoirs of Adolf Burger, a Jewish typesetter who had been a member of the forgery unit at Sachsenhausen, the story of Operation Bernhard was depicted in the 2007 Academy Award–winning movie The Counterfeiters (Die Fälscher).
The bogus British notes were extremely good forgeries and could fool the most experienced note handlers, including financial institutions. Indeed, the notes deceived even the Bank of England, which became aware that something was amiss only when it discovered that notes presented for redemption had already been recorded as redeemed and destroyed.
The fake pounds were typically circulated by German agents in neutral countries before they found their way to Great Britain. The notorious German secret agent, Elyesa Bazna, code name Cicero, was paid in counterfeit notes.19 Cicero, valet to the British Ambassador in Ankara, Turkey, provided his Nazi handlers with photographs of top secret Allied documents on high-level negotiations between the United States, the United Kingdom, and the Soviet Union. He subsequently fled to South America. Finding that his pounds were worthless, Bazna tried unsuccessfully to sue the West German government after the war.20
The economic consequences of the Nazi counterfeiting campaign are uncertain, in part because only a small proportion of the notes produced are believed to have actually found their way into circulation in the United Kingdom. Tight wartime economic controls and strict rationing would also have masked any effects. Nevertheless, the impact on public confidence in sterling was considerable. Although the magnitude of the operation was not immediately revealed, it was impossible to suppress news of the counterfeiting campaign, which began to filter out by May 1945 after the liberation of concentration camp prisoners.21 In early 1945, the Bank of England withdrew all denominations of £10 and greater from circulation, while users of £5 notes had to endorse them on the back before they would be accepted. Ostensibly, these measures were aimed at curbing “black-market operations, tax evasion, and the evasion of foreign currency controls.”22 In reality, they were imposed to deal with the German counterfeits. After the war, British bank notes were regarded with such suspicion that Canadian banks and the Bank of Canada’s Foreign Exchange Control Board refused to convert £5 notes brought home by a Globe and Mail correspondent returning from the United Kingdom in 1946 because of concerns that the notes might be counterfeit.23
United Kingdom, £50 Nazi counterfeit. Such was the quality of these counterfeits that only microscopic examination of the robes falling from Britannia’s knees and a tiny discrepancy in the capital “F” at the bottom left could expose them.
(National Currency Collection)
Counterfeit sterling notes produced in Operation Bernhard were dumped into Lake Toplitz by fleeing Nazis in early 1945, along with incriminating documents and, reputedly, a hoard of looted gold. Rumours of a sunken Nazi treasure in the remote Austrian alpine lake, located roughly 100 kilometres east of Salzburg, have been the inspiration for many thrillers and a number of failed, and sometimes deadly, recovery attempts. A U.S. navy diver died in 1947, as did another diver in 1963, after which the Austrian government imposed a ban on unauthorized diving expeditions. No gold was discovered. In 1959, however, an expedition financed by the German magazine Stern recovered crates of forged British pounds, along with a printing press.24 The notes of mixed denomination with an estimated face value of £6 million were turned over to the Bank of England and were subsequently incinerated, albeit with considerable difficulty because of their sodden condition. Notes had to be spread over the incinerator vault’s floor and left to dry before being fed into the flames.25 Over the following decades, more bogus notes periodically surfaced. In 2000, bundles of counterfeit pounds were recovered in the presence of Adolf Burger, by then eighty-three, the man the Nazis had forced to make them in Sachsenhausen concentration camp, and who had helped pack up the evidence of Operation Bernhard fifty-five years earlier.26
Interestingly, the Allies had given serious consideration to counterfeiting German currency but rejected the idea. Very early in the war, Winston Churchill, then First Lord of the Admiralty, asked Sir John Simon, Chancellor of the Exchequer, his opinion of such a plan. Churchill writes: “I hear from many quarters about a plan for scattering forged notes of marks in bundles or tempting little packets in Germany from our aeroplanes, like Pitt spread his assignats. I cannot fully think of the consequences of this but I should like to think it would be just as good as leaflets. I should very much like to know how it strikes you.”27 Simon replied that the Treasury had carefully considered the proposal but had rejected it: “the Noes have it.”28 The idea later resurfaced. In an exchange of memos in 1942 between S. D. Waley, a senior Treasury official, and John Maynard Keynes, then a Director of the Bank of England, Keynes agreed with Waley’s assessment that the amount of counterfeits they could produce “would not make any appreciable difference,” and that the British would look “silly” when they were found out. Keynes added that the idea of counterfeiting German bank notes had surfaced “at least a hundred times before and was always rejected for good and sufficient reasons.”29
At the same time that the British were contemplating the counterfeiting of German bank notes, so too were the Americans. In 1940, a year before the United States entered the war, American author John Steinbeck contacted President Franklin Roosevelt regarding a plan to counterfeit German marks with the aim of destabilizing the German monetary system. Roosevelt put Steinbeck and his associates in contact with Secretary of the Treasury Henry Morgenthau. Morgenthau did not like the idea. He considered it “crooked.” He also pointed out that the United States was not at war with Germany and that the Treasury “was the last place” for such a proposal to be discussed given “its responsibility to enforce the law against counterfeiting.”30 Morgenthau put Steinbeck in touch with Lord Lothian, British Ambassador to the United States. Later in the war, the idea re-emerged on several occasions but was not pursued. In one case, Colorado Senator Edwin Johnson, member of the Committee on Military Affairs, contacted Colonel William Donovan, Co-ordinator of Information, who later headed the Office of Strategic Services, the wartime forerunner of the Central Intelligence Agency (CIA), regarding the merits of counterfeiting German currency.31
The note used in U.S. propaganda during the Vietnam War.
(National Currency Collection)
During the Pacific campaign of World War II, the U.S. army, under the command of General MacArthur, counterfeited war notes issued by the Japanese for circulation in the Philippines. The counterfeit notes were distributed to Philippine guerrilla groups. The bogus notes exacerbated in a small way the over-issuance of notes by the occupying Japanese forces that led to hyperinflation.32
More recently, during the Vietnam War, it was reported that the United States Information Agency dropped replicas of North Vietnamese currency over Vietnam in propaganda operations. The fake 1- and 5-dong notes, which readily caught the eye, carried an extension with a message printed in Vietnamese saying: “Here is a resemblance of your money. Everyone knows it is losing purchasing power. The inflation is put on the people because of the war policy of your government. If the war goes on, your money will purchase less and less.”33 The propaganda extension could be trimmed off and the fake note circulated. A similar psychological operation was conducted in Iraq during the first Gulf War (1990–91) by U.S. military forces. In this case, the fronts of Iraqi bank notes were duplicated and propaganda messages printed on their backs.34
Canada’s most notorious modern-day counterfeiter, Wesley Weber, has been linked to Saddam Hussein’s Iraq. Press reports indicate that in the year 2000 Weber sold counterfeit $100 notes to a “Middle Eastern fellow in Windsor for 24 cents on the dollar.” Later, this individual invited him to meet an Iraqi embassy official and asked Weber “to consider moving to one of Saddam’s palaces” in Iraq. The man apparently said that Weber “could undermine the ‘West’ by printing counterfeit,” and would be treated like a “hero.” Weber did not take him up on this offer although he did sell “half a million dollars to a guy who was flying to Iraq.”35
While Iraq may or may not have considered a counterfeiting offensive against the “West,” forensic tests conducted by the U.S. Secret Service have identified North Korea as the source of high-quality counterfeit U.S. dollar “super notes.” First detected in 1989, some $50 million of such bills have been seized, with $22 million passed to the general public.36 According to the U.S. authorities, these notes are “produced and distributed with the full consent and control of the North Korean government.” The notes, which duplicate many of the security features found on genuine U.S. bills, can apparently fool most, though not all, cash handlers, including some machine authenticators.37 The North Korean campaign is most likely a criminal effort to obtain foreign currency with which to buy imports rather than a full-fledged attempt to sabotage the U.S. economy.
ENDNOTES FOR CHAPTER THREE
1Cooley, Currency Wars.
2Francis, History of the Bank of England, 78–79.
3Cooley, Currency Wars, 85.
4M. T. Bloom, The Brotherhood of Money: The Secret World of Bank Note Printers (Port Clinton, OH: BNR Press, 1983), 255. See also http://communities.northumberland.gov.uk/Humshaugh.htm.
5Cooley, Currency Wars, 103.
6Bloom, The Brotherhood of Money, 255.
7Cooley, Currency Wars, 109.
8Bloom, The Brotherhood of Money, 257. See also SGM H. A. Friedman, British Forgeries of the Stamps and Banknotes of the Central Powers, 2003, http://www.psywarrior.com/BritishForgeriesWWI.html.
9H. G. de Fraine, Servant of This House: Life in the Old Bank of England (London: Constable, 1960), 173–74.
10Ibid.
11Ibid., 175.
12Friedman, British Forgeries.
13Bloom, The Brotherhood of Money, 256–57.
14The Globe, “Soviet Backs Plot to Swamp World with Bogus Notes,” 4 April 1925.
15The Globe, “Bolsheviki Flood World with Counterfeit Money,” 6 April 1925.
16The Globe, “Red Russia Is Rejecting Cdn Paper Money; Thousands of Dollars of Counterfeit Dominion Notes Flood Country, It Is Alleged,” 29 April 1925.
17A. Burger, The Devil’s Workshop: A Memoir of the Nazi Counterfeiting Operation (London: Frontline Books, 2006).
18J. M. Keyworth, Forgery, the Artful Crime: A Brief History of the Forgery of Bank of England Notes (London: Bank of England, 2001), 18.
19Burger, The Devil’s Workshop, 172.
20In 1952, Cicero’s story was made into a movie, titled Five Fingers, starring James Mason. The film was nominated for two Academy Awards, and the script was later adapted for television.
21After the war, the Bank of England studied the economic consequences of the German counterfeiting campaign. The resulting “Reeves Report” subsequently disappeared. See Bender, Moneymakers, 308, footnote 11.
22Globe and Mail, “Huns Circulated False Currency to ‘Ruin’ Britain,” 8 June 1945.
23Globe and Mail, “You Can’t Counterfeit Gold,” 8 March 1947.
24L. Harding, “Last Dive for Lake Toplitz’s Nazi Gold,” The Guardian, 6 April 2005, http://www.guardian.co.uk/world/2005/apr/06/austria.secondworldwar.
25Bank of England, Memo to Chief Cashier, “Destruction of German Forgeries Salvaged from the Toplitzsee,” 1 December 1959, http://www.lawrencemalkin.com/kruegers-men-the-secret-documents-8-5-1.html.
26Burger, The Devil’s Workshop, 267.
27Admiralty, Letter from Winston Churchill to Sir John Simon, 24 September 1939, http://www.lawrencemalkin.com/kruegers-men-the-secret-documents-2-1-1.html.
28HM Treasury, Letter from Sir John Simon to Winston Churchill, 4 October 1939, http://www.lawrencemalkin.com/kruegers-men-the-secret-documents-2-2-1.html.
29HM Treasury, Exchange of Notes between S. D. Waley and J. M. Keynes, 26 May and 28 May 1942, http://www.lawrencemalkin.com/kruegers-men-the-secret-documents-2-2-1.html.
30U.S Treasury Department, Memorandum from Mr. Gaston to Secretary Morgenthau, 12 September 1940, http://www.lawrencemalkin.com/kruegers-men-the-secret-documents-3-2-2.html.
31U.S. Senate, Committee on Military Affairs, Letter from Senator Edwin Johnson to Colonel William Donavan, Coordinator of Information, 6 January 1942, http://www.lawrencemalkin.com/kruegers-men-the-secret-documents-3-5-1.html.
32S. H. Hanke and N. Kraus, “World Hyperinflations,” Cato Institute, Working Paper, 15 September 2012, 7, http://www.cato.org/sites/cato.org/files/pubs/pdf/workingpaper-8.pdf.
33Bloom, The Brotherhood of Money, 262–63.
34H. A. Friedman, “Operation PSYOP of Operation Desert Storm,” 17 January 2004, http://www.psywarrior.com/GulfWarBanknotes.html.
35D. Calleja, “Faking It,” Globe and Mail Report on Business, 27 April 2007.
36U.S. Treasury Department, The Use and Counterfeiting of United States Currency Abroad, 2006, 67.
37National Research Council of the National Academies, Committee on Technologies to Deter Counterfeiting, Board on Manufacturing and Engineering Design, A Path to the Next Generation of U.S. Banknotes: Keeping Them Real (Washington, DC: The National Academic Press, 2007), 27.