PART FIVE FINANCIAL
CHAPTER XIV. THE NON-GOVERNMENT COUNTERFITTER
The dictionary defines counterfeit as forged, false, fabricated without right, made in imitation of something else with a view to defraud by passing the false copy for genuine or original.
Thus, counterfeiting is a special case of fraud.
In a general case of fraud, the falseness consists of passing some good or article off
in return either for another good or for money.
In the case of counterfeiting, what is passed off as genuine is not a commodity or an article,
but money itself.
This special case of fraud constitutes theft, just as fraud in general does.
But with counterfeiting, there are certain complications.
The effects of counterfeiting depend entirely upon whether or not the counterfeit money
is ever exposed as such.
If it is, then the theft takes place in a rather straightforward way.
If the falseness is discovered before the counterfeiter himself can pass it off to the
Mr. B has given up a genuine good or service for a piece of paper which is then discovered to be fraudulent and worthless.
The piece of paper is destroyed and the first recipient is left with nothing.
If the discovery is made after the first recipient has passed it off unknowingly to a second
recipient, but before the second has had a chance to pass it along to a third, then this
second recipient takes the loss.
The second recipient loses because he has given the first recipient something of value
and has gotten nothing in return. If he can unearth the first recipient, the incidence
of the loss would be complicated by the fact that the first recipient is innocent of any
wrongdoing. The loss would probably have to be shared between the two recipients. Of course,
if the original passer of the false money can be found and made to pay, no loss will
will have taken place, since in effect no counterfeiting will have taken place.
But if none of the previous passers can be found after the fact, the recipient who is
discovered with the counterfeit money in his possession will bear the full loss, no matter
how many times it has already been passed.
If the counterfeit money is never discovered, the situation is radically different.
The losses due to counterfeiting are incurred not by any one individual, but by the entire
society in a rather complicated way.
The losses are not immediately apparent, for there is no one recipient who loses the total
value of the commodity given up in return for the counterfeit money.
But it is easy to see that there are losses, for the counterfeiter has gained a value without
without adding to the store of value of the rest of society.
Since there are only so many goods in the society at any one time, and the counterfeiter
has gained some through fraud, there must be others who have lost out.
The way the loss is spread out through the society depends upon the rise in prices caused
by the extra money, the counterfeited money, now in circulation.
That prices will rise in response to the activities of the counterfeiters is a foregone conclusion,
for counterfeiting increases the amount of money in circulation while the amount of goods
and services remains the same.
Prices will not rise all at once, nor will they rise smoothly and regularly.
Rather, prices will rise in waves, as does the water in a pool in response to a stone
and Disturbing the Equilibrium.
They will first be driven up in the industry or area of which the first recipient of the
counterfeit money is a member.
Prices will be driven up because the counterfeit money spent in the industry is extra, that
is, in the absence of the counterfeiting it would not have been spent.
Therefore, the first recipient benefits.
He has received money which would not have been forthcoming but for the counterfeiting,
and he is able to spend this extra money in an area where prices have not yet risen.
The first recipient gains this incremental difference, though it may be substantial,
it is in no way comparable to the counterfeiter's gain.
The second recipient also gains, as do all other recipients at the beginning of the ever-spreading
Banking Ripple Effect. For these people all receive the new money before prices have had
a chance to be pushed up by the extra money put into circulation by counterfeiting. However,
in time there will be a recipient of the imitation money who will just come out even. He will
receive money at a time when it is still possible to spend part of it in an area which has not
not yet had a counterfeit-induced price rise. If he spends his money in an area which has
not yet received a boost in prices, he will gain slightly from the inflation. If not,
he will lose. On the average, people in this phase of the monetary expansion will be neither
greatly benefited nor greatly harmed from the counterfeiting. People receiving the counterfeit
Counterfeit money after this stage bear the losses of the monetary expansion.
Before they receive any extra money, prices will have risen.
When the counterfeit money finally filters down to them, they will be net losers.
There are some groups, such as widows and retired people, who will always lose from
counterfeiting because during the spread of the counterfeit-induced inflation, their incomes
are fixed.
If all this is true, how can the counterfeiter be considered a hero? Given that the main
result of counterfeiting, which is eventually discovered, is to bilk the person caught holding
the bag, and that the main result of undiscovered counterfeiting is inflation, which eventually
harms many of us, it does indeed seem strange to call the counterfeiter a hero. The justification
The reason for calling the common private counterfeiter heroic is that there is a prior counterfeiter
in action, and that the money falsified by the private counterfeiter is not really legitimate
money.
Instead, it is itself counterfeit.
It is one thing to say that counterfeiting genuine money amounts to theft.
It is quite another thing to say that counterfeiting counterfeit money amounts to theft.
Perhaps an analogy will clarify this point.
Taking someone's rightfully owned property is theft and therefore unjustified, but no
such prescription holds for taking the wrongfully owned, stolen property of the thief.
Indeed, such an activity need not even be called theft.
In other words, an act which seems to be seemingly identical with theft is not illegitimate at
all if the victim has no legitimate claim over the articles taken.
If B steals something from A and then C takes it away from B, we cannot hold C guilty of
theft.
For the sake of simplicity, we can assume that the original owner, A, cannot be found
by C.
A forced transfer of goods is illegitimate only if the original owner was the rightful
owner.
If he was not, there was nothing untoward about the transfer.
In like manner, we can see that it does not follow from the fact that counterfeiting genuine
money is illegitimate that counterfeiting counterfeit money is illegitimate.
If the claims can be substantiated that the counterfeiting of counterfeit money is not
itself illegitimate, and that if the original money is indeed counterfeit, then it will
have been demonstrated that the private enterprise counterfeiter is not guilty of wrongdoing
and can perhaps be considered heroic.
The claim that the counterfeiting of counterfeit money is not itself illegitimate is based
Based on our understanding that such an activity is identical in form with stealing from a
thief.
The original dictionary definition of counterfeiting spoke of fabricating without right, and of
passing the false copy for genuine or original.
But if what is being copied is itself counterfeit, then the counterfeiter is not passing the
false copy for genuine.
He is only passing off another false copy.
And if fabricating without right means passing something off as genuine, then our counterfeiter
is not fabricating without right, for he is not in fact trying to pass something as genuine.
He is only trying to pass his handiwork as a copy of a counterfeit.
The money which our counterfeiter is copying is itself counterfeit.
It is made by a non-private counterfeiter, the government.
This is a serious charge, and is not made lightly.
Unappetizing though it may be, the fact is that governments everywhere make counterfeits
of real money, gold and silver.
Virtually all governments then forbid the use of real money, and allow only the use
of the counterfeits they fabricate.
This is equivalent to a private enterprise counterfeiter, not only copying the money
in circulation, but also preventing and prohibiting the circulation of the legal money.
Consider the monetary system before governments became deeply involved with it.
Gold and silver, and paper certificates representing them, were the circulating medium.
The government could not simply intrude on this system and impose its fiat currency,
currency based upon the compulsion of emperors, kings and presidents, not upon the voluntary
decisions of the people.
The people would not accept it as money and would not voluntarily give up their hard-earned
possessions for such tokens.
Instead, the government utilized gradualist methods in its quest to seize control of the
monetary mechanism.
Under the gold standard, private minters converted gold bullion into coins.
The weight of these coins was certified by the private minters, whose reputations for
accuracy and probity were their main stock in trade.
The first step of government was to seize monopoly control of the mints, proclaiming that coinage
was the proper domain of the sovereign and that private coiners could not be entrusted
with such an important task.
The government thus nationalized the mint.
The second stage was debasement.
After affixing the picture of the monarch on the coin to ensure the weight and quality,
The coins were sweated, stamped at a greater face weight than actual weight.
It was in this way that government counterfeiting began.
The third step was the enactment of legal tender laws.
These laws required that money be traded and counted at its official stamped value and
not at any other value, such as that based on weight.
A coin stamped at 10 gold ounces could legally be used in payment of a debt of 10 gold ounces,
even though the actual coin weighed only 8 gold ounces.
The protests of the creditor were ignored by the sovereign's court system under the
legal tender laws.
The purpose of such laws was, of course, to establish the acceptability of money counterfeited
by the government.
The government soon found that this was a small time operation.
There were limitations to the sweating of coins.
However, even slowly replacing full-bodied coins, coins whose gold content equalled the
stamped value with token coins, coins which are intrinsically valueless as metals, would
still not yield enough.
Even if the government seized as much as 100% of the value of the coin, the value of all
coins in total was limited.
A course of action with much greater potential for counterfeiting was begun.
Step 4 was then introduced.
The government stopped simply replacing gold coins with token coins and began creating
tokens representing more gold than it possessed.
Without the gold value of coins, nor of bullion, nor even the value of the gold in the ground,
any longer limited the scope of government counterfeiting.
With this innovation, government counterfeiting entered the fifth stage, the first civilized
stage.
Greenbacks, dollar bills, etc. could now be created seemingly without restraint.
The printing presses were turned up to high speed, and government counterfeit-induced
inflations began to take their place in the modern world.
With the sixth step, government spending received another shot in the arm.
Counterfeiting paper money, begun in the fifth stage, had been an improvement over counterfeiting
coins.
But the prospect of taking over banks and checkbook money offered an even greater improvement.
Depending on the reserve requirements of the banks, the banking system could create a multiple
monetary expansion through the well-known multiplier effect.
In all expanding economies, paper money outstrips coins, and bank checking deposit money outstrips
paper money.
Taking over the banks, then, as well as the monopoly of coin and paper note issue, provided
would further scope for the counterfeiting plans of government.
Again under the guise that the free market could not be trusted, the government enacted
legislation setting up the Central Bank and, later, the Federal Reserve System.
The Central Bank was given a monopoly over paper money note issue and the monetary tools,
and market operations setting the re-discount rate and loans to banks with which to keep
the entire banking system in a harmonious state of counterfeiting.
The main argument used by the government was that the so-called free or wildcat banks located
mainly in inaccessible areas of the Midwest were negligent in backing up their banknotes.
This charge was true in the main.
But the reasons for it, which stem from the War of 1812, are illustrative.
At the time of that war New England banks were the soundest in the country.
But New England was also the section of the country most opposed to the war.
The central government thus had to borrow mainly from the mid-western banks, whose note
issue far outstripped their gold stocks.
The government arrogated to itself the duty of maintaining the financial probity of the
banks, but reneged.
The government spent much of this money in the form of notes in New England.
When these banks presented the Midwestern notes for redemption, the government, further
shirking from its self-proclaimed duties, declared banking holidays and allowed the
The Wildcat Banks to renege on their obligations for several years.
The consequent exuberant policies which these banks followed gave private banking a bad
name and provided the government with the justification for taking over.
These private banks were encouraged in their counterfeiting operations by the government
itself.
At this stage of development there was only one fly in the ointment and it led the government
to take the seventh step. Some countries engaged in counterfeiting and hence inflation to a greater
degree than others. But when one country engages in a greater degree of counterfeiting inflation
than other countries, it becomes enmeshed in a balance of payment problems. If country A's
government counterfeits at a greater rate than country B's government, prices will rise faster
Forever.
There are several possible responses.
Government A could set a tax on imports, a tariff, or B could set a tax on exports.
Quotas could be set by both countries prohibiting trade beyond a certain point.
A could devalue its currency, making it easier for it to export and harder for it to import.
or B could revalue its currency with the opposite effects.
There are problems, however, with all of these responses.
Tariffs and quotas interfere with trade, specialization and the international division of labor.
Devaluations and revaluations are very disruptive and interfere with the system of international
trade which the world has spent so many years building.
In addition, they do not really solve the problem of imbalance, and currency crises are bound
to recur every time changes in the relative value of the various currencies of the world
occur.
The world is now undergoing this seventh step, hence it is difficult to trace it to its conclusion.
Two patterns, however, seem to be emerging.
One is the advent of a world monetary conference, of which Bretton Woods is an example.
At conferences of this type, the leading counterfeiter inflationists gather to discuss possible remedies
for their actions, although of course they do not see their role in this way.
They usually discuss adopting some version of the central banking system of the United
States for worldwide use.
Suggestions have been made for an international equivalent of our Federal Reserve System.
A strong world bank of this type would have much the same power over the entire world
that a national bank has over its own country.
It would have the power to force all banks to inflate in unison and to direct the inflation
to ensure that no power but itself shall be able to counterfeit money.
As each nationalistic counterfeiting center has so far jealously guarded its own powers,
such a World Central Bank has not yet come into existence.
An alternative system, popularized by Milton Friedman of the University of Chicago, is
the system of flexible exchange rates.
This system operates in such a way that whenever the prices or value of two countries' currencies
fall out of line with one another, they automatically readjust. That is, the currency prices of
the various countries are allowed to change in terms of one another. This is in significant
contrast to the agreements made at previous world monetary conferences in which these
prices are fixed in terms of each other. With a flexible system, if country A inflates at
At a higher rate than country B, there will be a relative excess supply of the currency
of A, which will drive its price down, choke off its imports and make its exports more
attractive.
The great advantage of the flexible exchange system over the fixed exchange systems of
the world monetary agreements is that it is an entirely automatic system.
Thus, the crises, which would occur under a fixed system every time currencies change
value with respect to one another, are avoided.
However, since both these systems are only superficial attempts to suppress the ill effects
which result from government counterfeit inflationary schemes, neither can be favored.
Paradoxically, these ill effects are good things.
Just as a pain in the body can be a warning of a far more serious condition and is therefore
beneficial, a balance of payments problem can be a signal of the menace of international
inflation.
Attempting to paper over these difficulties with flexible exchange rate schemes leaves
the world's economy open to the ravages of inflation.
It would be far better for the economy of the world and for every individual country
if instead of devising ways to prop up counterfeiting and the resultant inflation, the governments
of the world gave up these policies altogether.
In this connection, one cannot help daydreaming about treasury agents, the tea men of modern
and Television Serials.
Dedicated to the elimination of counterfeiting, dressed in the best FBI modern style, they
represent the essence of uncorruptible, ho-ho, tough law enforcers.
On television, their adventures usually begin with an overview of them walking down the
steps of the treasury building.
Were they to turn around and walk back up the steps and back into the officesividers
of their superiors and arrest them, they would be corralling perhaps the biggest gang of
counterfeiters the world has ever known.
As to the claim that the private counterfeiter is a hero, three criteria for heroic actions
must be applied.
The act must not violate the rights of innocent people.
The act must be of great benefit to large numbers of people.
and it must be performed at great personal risk.
There can be no doubt regarding the third point.
Non-governmental counterfeiters operate at great risk to themselves.
The government has declared such activity illegal.
The Treasury Department spends large sums of money to apprehend private counterfeiters.
The government stands ready to prosecute all those accused of counterfeiting and to jail
for all who are found guilty. It cannot be doubted that the risk criterion is more than
amply met. Furthermore, it is clear that the activities of private counterfeiters are beneficial
to the public. Non-governmental counterfeiting, if allowed to be pursued, would spell the
ruin of the government's own system of counterfeit money. The extent to which non-government
The extent to which the effectiveness of the government's own counterfeit system is decreased.
The fact that the government's counterfeit system is very harmful constitutes in itself
a strong prima facie case for non-government counterfeiting.
Of course private counterfeiting is illegal and cannot therefore be advocated.
Well, it is of interest to spin out the implications of economic theory.
It may be objected that if private counterfeiters gained power and replaced the government,
the people would be no better off.
This of course is true.
But the fact is that private counterfeiters are small time and will undoubtedly remain
so.
They could pose no more than a minor problem.
It is in fact this reality which clinches the argument for private counterfeiters.
They do not pose a threat to the people.
They are not, nor are they likely to become, strong enough to do that.
The effect they have is to reduce and counteract the great evil of government counterfeiting.
This is beneficial for great numbers of people.
Although a few individuals may suffer a loss from this activity, on balance, the activity
of the private counterfeiter is more beneficial than harmful.
And it must be remembered, their activity is not fraudulent and hence immoral, since
they do not seek to pass off counterfeit money for genuine.