Paper Money

How grading services changed the paper money market

A revolution began in 2005 and things have not been the same since. The concept of third-party grading made the leap from coins to paper money when the two major grading services introduced slabbing for notes.

Paper Money Guaranty and PCGS Currency were both founded in 2005 by the same entities that owned Numismatic Guaranty Corp. and Professional Coin Grading Service. The idea behind both new firms was to afford paper money collectors the same levels of confidence as coin collectors enjoyed when buying a new item for their collections — that the note was genuine and met a specific set of grading standards, and that any “problems” were identified and described. Nearly 12 years after these two firms began grading silver certificates, Federal Reserve Bank notes, refunding certificates, and national bank notes, today most of the important and valuable notes are housed in slabs by one of the two firms.

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To show you how little emphasis was placed on paper money grading, the chapter on grading totals 16 pages in length in the 1990 edition of the Coin World Almanac, and devotes just one page to paper money. The other 15 pages deal with grading coins. Even the 2011 edition devotes just slightly more than one page to the grading of notes. 

Before 2005

Paper money grading standards slowly took form years after coin grading (codification of coin standards began in the 1890s). Two individuals with the last names of Long and Sandrock began efforts to formulate paper money grading standards in the 1960s. In 1970, Guy A. Cruse created a system of grading. In 1984, Herbert J. Kwart published a 44-page pamphlet, United States Paper Money Grading Standards, that was a serious effort at codifying a set of standards.

In his introduction, Kwart sums up the then-current status of grading standards, writing: “At the present time there is no all inclusive acceptable paper money grading standard available. This, in my opinion, is the major cause that is delaying growth in this endeavor. What prevails is an inept hybrid so called ubiquitous grading set of conditions which over the years has been under scrutiny and criticism. It is completely devoid of detail in grading characteristics that distinctly separate each grade level.”

His pamphlet, he said, was an effort to correct this problem.

He acknowledged that his pioneering system could not “cover the total and precise spectrum of every grading characteristic known, but it does attempt to eliminate as much of the grey area as possible, thereby making paper money grading less subjective than it was without any definitive grading system at all.”

Kwart offered several innovative concepts, including an expansion of the top grade then recognized: Crisp Uncirculated. In theory, a Crisp Uncirculated note should have the “crispness” of a new note freshly off the printing press. Anyone who has ever gotten brand new notes from an automated-teller machine should understand the concept of crispness. Such a note has a distinctive feel, characteristics that disappear as a note circulates and becomes increasingly “limp” and possessing of folds and tears.

Kwart’s four levels of Crisp Uncirculated were Superb Gem Crisp Uncirculated, with the numerical grade of CU-67; Gem, equal to a standard of CU-65; Choice, or CU-63; and finally just Crisp Uncirculated, or CU-60. Obviously the author was attempting to use the same numerical grading standards that were becoming popular in the grading of U.S. coins in the early days of third-party grading.

Kwart identified the characteristics necessary for each level of Crisp Uncirculated. A Superb Gem note, for example, needed to be “flawless in appearance” with “an extra aura of brightness, sharpness, and crispness just as if you had acquired it from just off the presses of the Bureau of Engraving and Printing.” Such a note also had to well-centered with even margins on all four sides, and void of any sort of damage.

At the bottom of the CU spectrum, a CU-60 note still needed to be Uncirculated, but was permitted to have “some loss of brightness” though it still needed “signs of original crispness.” Even though the note was supposed to be Uncirculated, a CU-60 noted could have minor handling imperfections (small pin holes and minor smudges), just as a Mint State 60 coin can have multiple contact marks and other problems. 

For circulated notes, Kwart recognized eight levels, all bearing names familiar to coin collectors: Poor, Fair, Good, Very Good, Fine, Very Fine, Extra Fine, and About Uncirculated. As with the four levels of Crisp Uncirculated, the author provided a set of standards for each level. As with a coin grading at the bottom, a note grading Poor “is the bottom line, for total degradation,” adding, “It may or may not be more than a filthy rag evidencing severe damage in all aspects,” and could exhibit repairs.

Kwart’s 12-grade standards were an expansion of what was found in three standard paper money books then in publication, each listing or describing from three to six grades. Some of the books did not even define the grades, leaving it to the user to distinguish between a note grading New and one in Extra Fine, for example.

While Kwart’s standards represented a serious effort at standardizing standards, they do not appear to have made much of an impression on the collecting community. His name only appears in Coin World’s index a couple of times, mostly in a few articles published about his new pamphlet in 1984. The only mentions since then are in a historical context, in references to his standards.

Fast forward to 2005

Third-party grading for coins began in the early 1970s through the International Numismatic Society Authentication Bureau and American Numismatic Association Certification Service. Third-party grading as we know it today — with the use of sealed plastic slabs — began in 1986 with the founding of PCGS and extending to NGC a year later. Nearly two decades would pass before third-party grading made its debut for paper money. 

Late in 2004, Certified Collectibles Group, parent company to NGC, revealed plans to begin grading paper money in February 2005. According to Certified Collectibles Group CEO Steve Eichenbaum: “For a long time the marketplace has needed a third-party grading service whose standards are beyond reproach and whose people possess the skills needed to do the job properly. Collectors and dealers will be able to buy in confidence, enjoying the same reliable certification that coin enthusiasts have known with NGC for many years.”

As the PMG website notes today, “The same problems that plagued coin collectors prior to third-party coin grading affected collectors of paper money — without third-party grading, it was easy for sellers to overstate a note’s grade and many counterfeit and altered notes were unwittingly purchased as genuine.”

Shortly after CCG announced plans for PMG, Collectors Universe Inc., parent to PCGS, announced PCGS Currency Grading. “The new division will operate under the well-known and respected PCGS name,” said PCGS founder and president David Hall. “... With the widespread crossover between rare coin and currency dealers, we decided to extend the brand to paper money.” Hall said PCGS had been “discussing this possibility for several years. Recently we’ve noticed an increase in the demand from both the dealer and collector community for a third party grading service. We feel the time is right to launch this initiative.”

Since the two firms went into business, they have graded some 2 million notes combined. PMG has certified “more than 1.5 million notes,” while PCGS Currency — now under different ownership — has certified “more than 700,000 notes.”

The standards

Both firms certify and grade paper money on a 1–70 scale similar to that used by the coin grading services. The scales are similar though the two firms use somewhat different terms. PCGS Currency use “New” while PMG uses “Uncirculated” for notes with circulation wear. 

Both services recognize superior paper quality, with PMG assigning a note meeting its standards as Exceptional Paper Quality and PCGS Currency assigning Premium Paper Quality. 

PCGS Currency defines what is necessary to earn the PPQ label, “To distinguish notes that bear all the hallmarks of complete originality and outstanding paper quality for the grade, we will affix a ‘PPQ’ (Premium Paper Quality) designation to the grade (e.g.: ‘Gem New 65PPQ’). These are notes that bear no visible evidence of restoration and that retain all signs of fully original paper quality, such as paper wave, embossing, and bold ink color and eye appeal. ‘PPQ’ notes should also have above average paper for the grade that is free of defects such as tears, pinholes, or other problems.”

PMG will not give an EPQ rating to a note grading less than Gem Uncirculated 65.

The two firms have made note descriptions much more transparent than they often were in the past in that the grading labels in the slabs identify problems. Consider, for example, a recently offered $20 compound interest note (F-191a) of Aug. 15, 1864. It was described as graded Very Fine 30 Apparent, Edge Splits and Minor Restorations by PCGS Currency. Similarly, a Series 1934 Chicago district $5,000 Federal Reserve note was described as grading Paper Money Guaranty Extremely Fine 40 Net, Repairs.

For PMG, “A ‘Net’ graded note is one that exhibits mishandling or problems that are more significant than one would expect for the assigned numeric grade.” For PCGS Currency, “The ‘Apparent’ grade will equate to what the note would have graded without the mentioned problems.”

By describing imperfections on the label within the sealed holder, the grading services provide potential buyers information that may or may not have been disclosed in the past by a seller. That is important, because a note with a Very Fine 30 Apparent grade would be expected to realize less than a note graded Very Fine 30.

A cursory look at auction catalogs today reveals that most valuable and rare notes are now in the slabs of one of the two firms, just like most significant U.S. coins are graded by one of the major grading services.

While Q. David Bowers wrote these words just as the two firms were beginning to grade notes, in his column in the Jan. 31, 2005, issue of Coin World, the sentiments remain true today: “The recent announcements by the corporate owners of the highly esteemed Professional Coin Grading Service and Numismatic Guaranty Corporation of America that each plans to enter the commercial grading of paper money will no doubt have wide effects on that niche of numismatics. While old-timers might not care much, for the vast majority of casual collectors this will add a measure of security and marketability. Dealers will be appreciative, too, as it will simplify marketing and make up for any lack of expertise they may have.”

Arthur L. Friedberg, Coin World’s Paper Money market analyst and co-author of the standard reference on U.S. paper money, Paper Money of the United States, said Jan. 17: “Even though the grading standards may vary from one to the other, they have delivered a level of consistency that had been heretofore lacking. While repairing notes to improve their appearance has been a long time practice, until the advent of the grading services, it was not a fact that was often disclosed by some dealers to buyers.”

He added: “One of the important achievements of PMG and PCGS Currency is that they disclose all repairs on the holder. There is nothing wrong with restoration to improve appearance, and the disclosure of same has removed any nefarious connotation to doing so. The fact that they publish their census data gives us a better idea as to the rarity of a note. Pieces outstanding is far more useful than the amount made since so much paper money has been recalled or redeemed. We also have a good idea about scarcity based on grade, since we know the number of pieces in each condition to which grades have been assigned. Finally, the service’s role in authentication cannot be overstated, especially as it applies to the sometime difficult yet prolific U.S. issues of the 1860s.”

The grading services also provide buyers and sellers with guarantees that the note within a slab is genuine and that it meets the grade assigned (with exceptions). Just as with coins, high-quality counterfeit notes can be found, so unless a buyer is an expert in paper money counterfeit detection, buying a certified note makes sense. 

If the long-term existence of coin grading services is any indication, it seems likely that the two paper money services are here to stay.

Using the services

Both firms require potential customers to join their “Collectors Club” in order to enjoy the privilege of directly submitting notes for grading and certification. 

For subscribers in the United States, PCGS Currency has three levels of membership, “Silver,” $49.95 annually; “Gold,” $119; and “Platinum,” $229. The level of service provided by the different levels increases with the annual fee. (International customers pay higher fees for the two upper levels.) Contact the firm here.

For subscribers to PMG, four levels are offered, including a free level that affords access to the company’s online resources. Paid memberships cost $39, $149, and $299, with the level of membership best determined by the number of notes one plans to submit for certification. Also, members of the American Numismatic Association can sign up for a free submission membership. Go to the PMG website here.

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