Nazi counterfeiting "destroyed" confidence in the British currency in Europe by the end of World War II, according to newly released MI5 files.
A 1945 report in the National Archives suggests Germany began production of the fake notes five years earlier in a bid to undermine sterling.
Notes began to enter neutral countries by D-Day and the Bank of England issued the first of two recalls.
The Nazis produced counterfeit sterling with a face value of £134m in total.
That was the equivalent of 10% of all sterling in circulation.
The newly released files include a report on currency, written by banker Sir Edward Reid of MI5's section B1B in August 1945.
He said a captured SS Officer revealed that the Germans had started to make fake notes in 1940, planning to scatter them from the air during the invasion of Britain, creating confusion, damaging confidence.
Although the invasion was postponed, the work continued, and the quality of counterfeits improved.
He noted the fraud became so skilful that "it is impossible for anyone other than a specially trained expert to detect the difference between them and genuine notes".
Black market
Although MI5 did not realise it at the time, the notes were being made at the Sachsenhausen concentration camp by prisoners, many of whom were Jewish.
I met one, Adolph Burger, in 2007. He proudly showed me one of his £5 notes.
On watermarked paper, with elegant copperplate script, and engraving of Britannia, it was a perfect counterfeit.
He knew, because there was a pinhole in the Britannia, that it was a Sachsenhausen product.
The prisoners had marked these notes.
Not all the notes were used, but as early as 1943 the Bank of England were concerned.
According to John Keyworth, the Bank's historian, that was when all notes with a face value of £10 or more were recalled.
MI5 knew that German agents arriving in Britain were supplied with fake notes, and that counterfeits with a face value of thousands were being used in neutral countries.
The fake notes circulated in neutral Portugal and Spain, partly with the objective of raising money for the Nazi cause, and later turned up in Egypt.
After D-Day in June 1944, large numbers of these notes started to appear in Britain.
According to MI5, Allied soldiers - mostly Polish and American - had been selling army stores on the black market for French francs and then trading these for discounted sterling notes.
When these were brought to British banks, they were found to be forgeries.
Charlie Chaplin files
Although this trade had been falling off in August 1945, according to Sir Edward the only way to restore confidence in the currency would be for the Bank of England to recall all notes with a face value of £5 or more, and print new ones.
That is what happened.
The bank issued new notes with an added security feature - a metal strip.
"In general it can be said that the German object of destroying confidence abroad in Bank of England notes has been achieved," Sir Edward wrote.
The MI5 files released also include one on the British actor Charlie Chaplin, begun in 1952.
That was when the FBI decided to revoke his US re-entry permit, partly because they believed he was a Communist.
MI5 investigated, and decided he was not a security risk.
However, they could not find his birth certificate which led them to speculate he might not have been born in south London in 1889, as he had always claimed.
Chaplin's official biographer, David Robinson, has dismissed that, saying not every birth was registered at that time.
He has found plenty of evidence that Chaplin's family were in London then, in and out of the workhouse.
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