Books / Digital Text

Legalized Counterfeiting

Counterfeiters are generally reviled, and for good reason. One reason that gold and silver make good moneys is that they are easily recognizable, and are particularly difficult to simulate by counterfeits. “Coin-clipping,” the practice of shaving edges off coins, was effectively stopped when the process of “milling” (putting vertical ridges onto the edges of coins) was developed. Private counterfeiting, therefore, has never been an important problem. But what happens when government sanctions, and in effect legalizes, counterfeiting, either by itself or by other institutions? Counterfeiting then becomes a grave economic and social problem indeed. For then there is no one to guard our guardians against their depredations of private property.

Historically, there have been two major kinds of legalized counterfeiting. One is government paper money. Under a gold standard, say that the currency unit in a society has become “one dollar,” defined as 1/20 of an ounce of gold. At first, coins are minted with a certified weight of gold. Then, at one point, the first time in the North American colonies in 1690, a central government, perhaps because it is short of gold, decides to print paper tickets denominated in gold weights. At the beginning, the government prints the money as if it is equivalent to the weight of gold: a “ten dollar” ticket, or paper note, is so denominated because it implies equivalence to a “ten-dollar” gold coin, that is, a coin weighing 1/2 an ounce of gold. At first, the equivalence is maintained because the government promises redemption of this paper ticket in the same weight of gold whenever the ticket is presented to the government's Treasury. A “ten-dollar” note is pledged to be redeemable in 1/2 an ounce of gold. And at the beginning, if the government has little or no gold on hand, as was the case in Massachusetts in 1690, the explicit or implicit pledge is that very soon, in a year or two, the tickets will be redeemable in that weight of gold. And if the government is still trusted by the public, it might be able, at first, to pass these notes as equivalent to gold.

So long as the paper notes are treated on the market as equivalent to gold, the newly issued tickets add to the total money supply, and also serve to redistribute society's income and wealth. Thus, suppose that the government needs money quickly for whatever reason. It only has a stock of $2 million in gold on hand; it promptly issues $5 million in paper tickets, and spends it for whatever expenditure it deems necessary: say, in grants and loans to relatives of top government officials. Suppose, for example, the total gold stock outstanding in the country is $10 million, of which $2 million is in government hands; then, the issue of another $5 million in paper tickets increases the total quantity of money stock in the country by 50 percent. But the new funds are not proportionately distributed; on the contrary, the new $5 million goes first to the government. Then next to the relatives of officials, then to whomever sells goods and services to those relatives, and so on.

If the government falls prey to the temptation of printing a great deal of new money, not only will prices go up, but the “quality” of the money will become suspect in that society, and the lack of redeemability in gold may lead the market to accelerated discounting of that money in terms of gold. And if the money is not at all redeemable in gold, the rate of discount will accelerate further. In the American Revolution, the Continental Congress issued a great amount of non-redeemable paper dollars, which soon discounted radically, and in a few years, fell to such an enormous discount that they became literally worthless and disappeared from circulation. The common phrase “Not worth a Continental” became part of American folklore as a result of this runaway depreciation and accelerated worthlessness of the Continental dollars.

Shield icon library