Encyclopedia of Money: O

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OTTOMAN EMPIRE CURRENCY

At its height, the Ottoman Empire ruled present-day Turkey, the Middle East, North Africa (including Egypt), and southeastern Europe. By World War I, the Ottoman Empire had largely disintegrated, and after the war the core of the empire was organized as the Republic of Turkey. Although the Sunni-Ottoman dynasty dates back to the 13th century, the empire became a power to be reckoned with after the capture of onstantinople

in 1453. Perhaps the most famous sultan of the Ottoman Empire was Suleiman the Magnificent (1520–1566), whose conquest in the 16th century gave the Ottoman Empire control of East-West trade.

The prime coins of the Ottoman Empire were the akce, silver coins that provided the basis of monetary calculations for prices and wages. Suleiman’s architect earned 55 akce per day. A niche for smaller coins was filled by the dirham, with its quarter, and the manghir, which were copper. The most important gold coin was the ashrafit, patterned after the Venetian ducat. To compete with Austrian talers, which rapidly gained acceptance in areas of the empire, Suleiman III (1687–1691) minted a silver coin known as the qurush.

To meet the coinage needs of the empire, the Ottomans purchased blank coins from Austria and the Dutch.

Unlike other Islamic coinage, which often bore religious inscriptions, Ottoman coins bore inscriptions of the Sultan’s titles. One coin bore an inscription that translates as “sultan of the two lands and lord of the two seas.”

Mechanized methods of minting coins first appeared in Turkey in the mid- 19th century, two hundred years later than the widespread adoption of these methods in Europe. Iran saw its first mechanized mint established in Tehran in 1876. In the 20th century, European mechanized mints supplied coins for colonized areas of the Ottoman Empire.

Paper money also made its debut in the mid-19th century. The Ottomans led the way with the issuance of notes in Turkey, setting an example that was soon followed by other provinces of the empire. Iran waited until the late 1880s to issue banknotes. Colonial powers often introduced paper money, paving the way for newly independent countries to issue their own paper money. In the 20th century, the paper money issued in countries of the old Ottoman Empire was often printed in European countries. A British firm, De La Rue, printed paper money for Iraq until the invasion of Kuwait in 1990 cut Iraq off from Europe.

OPTIMAL CURRENCY AREA

In the post–World War II era, economists raised the issue of the optimal currency area, which is that area that stands to gain from an independent currency. The issue grew in importance as Europe made plans to establish an all-European currency, the euro, to replace individual national currencies such as the German mark, French franc, and Swiss franc. Although Europe merged into one large currency area, the break-up of the Soviet

Union held out the spectacle of a large currency area splintering into smaller currency areas. New nations such as Ukraine replaced rubles with their own currency.

One theory of optimal currency areas emphasizes the importance of resource immobility. Consider two areas, one with a high unemployment rate and another with a low unemployment rate. If labor is a mobile resource, the unemployed workers will migrate to the area with the low unemployment rate. If labor is not mobile, due to distance, national laws, or language differences, then differences in currency exchange rates between the two geographical areas can serve some of the same purpose, assuming the two areas have their own separate currencies. The area with high unemployment can lower the value of its currency, making its exports cheaper to the area with low unemployment. Also, the lowered currency value will increase the cost of imports to the high-unemployment area, encouraging domestic consumers to buy locally produced goods. Therefore, adjustments in the exchange rate will increase the demand for goods produced in the high-unemployment area, and lower the demand for goods produced in the low-unemployment area, indicating that areas with immobile resources should have their own currency. According to this criterion, Canada is probably too large to have a single currency because of the vast distance between the east coast and west coast, making mobility

difficult. Among members of the European Union, reductions in barriers restricting the flow of capital and labor between countries preceded the introduction of the euro in 1999.

Another theory of optimal currency areas looks at the importance of internal trade relative to trade with outsiders. In the case of Europe, this theory looks at the size of trade between European countries, such as France and Germany, relative to the size of trade between Europe as a whole and outsiders, such as the

United States. An area that trades a great deal with itself, and not so much with the rest of the world, should qualify as an optimal currency area, and have its own currency. Under this criterion, Canada again would not constitute an optimal currency area if regions in Canada traded largely with the United States, rather than

with other regions in Canada. If regions in Canada trade mostly with other Canadian regions, then Canada benefits from having its own currency. This criterion leaves the case of Europe somewhat in limbo, because Europe trades significantly within itself, but also trades significantly with outsiders.

Another criterion for an optimal currency area is that the area must have institutions that can make political and technical decisions for the area as a whole. Nation-states are the most obvious currency areas for this reason. Canada obviously qualifies as an optimal currency area under this criterion. Europe has moved toward political integration, including the election of a European Parliament, making Europe much more suitable as an optimal currency area.

See also: Euro Currency, European Currency Unit, Snake,

The References

McKinnon, Ronald I. “Optimal Currency Areas.” American Economic Review, vol. 53 (1963): 717–725.

Melitz, Jacques. “The Theory of Optimal Currency Areas.” Open Economies Review, vol. 7, no. 2 (April 1996): 99–116.

Mundell, Robert A. “A Theory of Optimal Currency Areas.” American Economic Review, vol. 51 (1961): 637–665.

OPERATION BERNHARD

The scale of Operation Bernhard dwarfs all other counterfeiting operations in the history of paper money. Nazi Germany counterfeited British £5 banknotes and, later, £50 banknotes to fund its foreign intelligence operations. Operation Bernhard got its name from Bernhard Kruger, who headed a workshop in which Germany’s security service forged passports, motor licenses, university degrees, and other personal documents.

Counterfeiting as a weapon of war stretched well back into the 19th century, and at the beginning of World War II, Britain had dropped forged German food and clothing coupons over Germany and had made awkward attempts to counterfeit German marks. Germany’s technical mastery of counterfeiting, however, far

surpassed all preceding operations.

The decision to counterfeit money went all the way to Adolf Hitler, who approved counterfeiting British pounds in his own handwriting but with the proviso that “dollars, no. We’re not at war with the United States” (Pirie, 1962, 6). Germany stuck to counterfeiting Bank of England banknotes even after the United States entered the war, but toward the end of the war German apparently prepared plates to counterfeit French francs and U.S. dollars.

The practical problem of counterfeiting British banknotes was broken down into three separate parts: (1) production of paper identical to paper in British banknotes, (2) construction of plates identical with Bank of England plates, and (3) devising a numbering system.

After finding that rags made from Turkish flax produced paper almost identical to Bank of England banknotes, the Germans hit on the expedient of sending the rags to factories to get dirty first, and then cleaned the used rags before using them to make banknote paper. Engravers spent seven months making plates that matched the original prints even when enlarged 20-fold. The numbering problem was the last to be solved. Apparently,

the necessity of developing a numbering system that would blend in with the British numbering system posed the most troublesome obstacle. The finished plates were among the most closely guarded secrets in Germany.

Later in the project, the German counterfeiters attacked the problem of making the notes age. As printed notes age, the oil in the printing ink begins to seep into surrounding areas, blurring the quality of the print. German counterfeit notes were not aging properly until the Germans learned to treat their printing ink with

chemicals to make it seep into surrounding areas, producing an aging effect.

After the technical problems were solved, the Germans sent an agent to the Swiss, carrying a bundle of counterfeit notes and a letter from the Deutsche Reichsbank asking the Swiss to find out if the notes were forged. When the Swiss replied that the notes were genuine without a doubt, the agent feigned a lingering

suspicion and asked the Swiss to check with the Bank of England. The Bank of England also returned a reply that the notes were genuine.

At first, the German government planned to use an infusion of counterfeit notes to ruin the British economy, but efforts to inject large quantities of notes into circulation led to diplomatic embarrassments, and the German government dropped the plan. Then Germany’s secret intelligence service decided to use counterfeit notes to finance its operations, and that is how the counterfeit notes were put into circulation.

The Bank of England banknotes were counterfeited at the Sachsenhausen concentration camp. Three hundred prisoners, some of them experts in forgery, took part in the project, and for a time these prisoners produced 400,000 notes per month. About £130 million were counterfeited in banknotes. As the demand for counterfeit money increased, the Germans began to counterfeit £50 notes.

Both the Germans and the Allies kept Operation Bernhard a secret. Because of the circulation of counterfeited banknotes, the Bank of England withdrew all notes of £10 or above in 1943 and changed the paper of the £5 note in 1944. In May 1945, notes from £10 to £1,000 ceased to be legal tender.

Toward the end of the war, the Germans dumped counterfeiting supplies and a vast quantity of notes into the

Toplitzee, a lake in Austria. Large numbers of floating notes fueled rumors of the dumping, and the Allies sent divers into the lake, but no banknotes were recovered. The first public knowledge of Operation Bernhard came in 1952 when Readers Digest carried an article about it, and gradually more knowledge of the operation came to light. Only in 1959 did divers finally recover the vast quantities of notes and printing supplies. Notes

recovered from the lake were indistinguishable from genuine Bank of England notes.

Apparently, some of the notes continued to circulate until 1955, when the Bank of England went to colored notes, and its older notes ceased to be legal tender. Some evidence suggests that as late as 1961 these notes were sold behind the Iron Curtain to people looking for a store of wealth until the communist regimes fell.

OPEN MARKET OPERATIONS

Open market operations are the most important means of expanding and contracting money supplies in modern monetary systems regulated by central banks. Central banks, such as the Federal Reserve System in the United States, regulate money supplies as a means of maintaining economic stability and price stability.

To infuse additional money into the U.S. economy, the Federal Reserve System purchases U.S. government bonds, paying for the bonds with freshly created funds added to commercial bank deposits at any of the twelve Federal Reserve Banks. Commercial bank deposits at Federal Reserve Banks, coupled with vault cash, make up what is called “high-powered money,” because a system of commercial banks, making loans, can expand customer demand deposits by some multiple of the volume of high-powered money.

To withdraw money from circulation in the U.S. economy, the Federal Reserve system sells from its holdings of U.S. government bonds, and withdraws the proceeds of the sales from circulation and the banking system, leading to a contraction of money supplies.

The Bank of England may have been the first to regulate credit markets along the lines of modern open market operations. Late in the 19th century, the Bank of England would borrow funds in the London money market as a means of raising interest rates.

The Federal Reserve System apparently discovered by accident the practice of open market operations as an instrument of monetary control. The Federal Reserve Act of 1913 did not specifically address open market operations but did empower individual Federal Reserve Banks to buy and sell securities along the lines set forth by the rule sand regulations of the the Federal Reserve Board.

An economic slowdown in the 1920s reduced the demand for Federal Reserve Bank loans to commercial banks. Federal Reserve Banks began buying government securities in the open market as a means of acquiring incomeearning assets, compensating for the loss in the discount loan business to commercial banks. At first, individual Federal Reserve Banks separately purchased government securities, occasionally pitting

individual banks against each other in bidding for securities. The Federal Reserve Banks collectively decided to coordinate all purchases of government securities through the New York Federal Reserve Bank. In 1922, the then Federal Reserve Board, since renamed the Board of Governors of the Federal Reserve System, established a special committee, composed of board members and officials of the Federal Reserve Banks, to

make decisions about open market operations. The comparable committee is now called the Federal Open Market Committee.

The Federal Reserve Banks soon learned the impact of open market operations on money supplies, interest rates, and credit conditions, but the board remained split on the wisdom of open market operations until the 1930s. During the Great Depression of the 1930s, open market operations began to play a larger role in monetary policy. By the end of World War II, open market operations had become the most important

tool in the central bank arsenal of monetary controls.

References Anderson, Clay J. 1965. A Half-Century of Federal Reserve Policymaking, 1914–1964.

Baye, Michael R., and Dennis W. Jansen. 1995. Money, Banking, and Financial Markets: An Economics Approach.

Klein, John J. 1986. Money and the Economy, 6th ed.