Opportunities and Challenges of the U.S. Dollar as an Increasingly Global Currency: A Federal Reserve Perspective

Federal Reserve Bulletin, Sept, 2001 by Michael J. Lambert, Kristin D. Stanton

The National Banking Act of 1863 required national banks to invest in federal bonds, which entitled the banks to issue bank notes equal to 90 percent of the value of the bonds (the bonds were deposited with the Department of the Treasury). In contrast to state bank notes, the national bank notes were uniform in design and were imprinted with the name and charter number of the issuing bank. These notes were printed and used in circulation until 1935.

The Federal Reserve Act of 1913 gave to the Federal Reserve central control over currency issuance, but the Congress gave responsibility for designing U.S. currency to the Department of the Treasury and established the Secret Service as a Treasury bureau to guard against counterfeiting activity. As the Federal Reserve and the Department of the Treasury gained control of the design and issuance of U.S. currency, counterfeiting activity declined and remained relatively low for nearly seventy years. Over time, however, as U.S. currency achieved a greater global presence and as advances in technology provided opportunities for counterfeiters, new counterfeiting threats emerged both domestically and internationally.

Today, the Secret Service categorizes counterfeit currency by domestic or foreign origin, by method of production, and by whether the counterfeits represent an actual loss to the public. Some counterfeits are seized by law enforcement agencies before they circulate, whereas passed counterfeits have gone into circulation and represent an economic loss to the public--specifically, the final holders of counterfeit notes (chart 6). While any economic loss to the public is unfortunate, the domestic loss has generally been small; in 2000, for example, it represented only two-tenths of 1 percent of the total value of domestic currency in circulation, or about 15 cents per U.S. citizen.

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Traditionally, counterfeiters have produced bank-note forgeries with offset presses, which require considerable skill to operate and are expensive to purchase. As computer and reprographic technologies have improved, however, the skills required and costs associated with bank-note forgeries have declined significantly. At first, with advances in reprographic technology, unskilled counterfeiters were able to produce forgeries on color copiers. Fortunately, because such reprographic equipment is expensive and normally located in view of other office workers, volumes of counterfeits have tended to be relatively small. Nevertheless, in fiscal year 1995, the U.S. public lost $2.4 million because of color-copier counterfeits.

The use of color copiers to counterfeit currency was not unique to the United States. Because of the pervasiveness of the problem, an international group initiated discussions with the color-copier industry to address possible solutions to the counterfeiting threat. The international group successfully negotiated a technical solution, which was implemented in color-copier equipment, to recognize bank notes and prevent them from being copied. The technology has been highly effective in reducing color-copier counterfeiting, and in fiscal year 2000, losses in the United States had fallen nearly 60 percent from their 1995 level, to $1 million.