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NOTE Legalized Counterfeiting

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Legalized Counterfitting

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Counterfitters are generally reviled and for good reason.

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One reason that gold and silver make good monies is that they are easily recognizable

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and are particularly difficult to simulate by counterfits.

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Coin clipping, the practice of shaving edges off coins, was effectively stopped

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when the process of milling, putting vertical ridges onto the edges of coins, was developed.

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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?

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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.

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and Property. Historically, there have been two major kinds of legalized counterfeiting.

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One is government paper money. Under gold standard, say that the currency unit in a

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society has become one dollar, defined as one twentieth of an ounce of gold. At first,

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coins are minted with a certified weight of gold. Then, at one point, the first time in

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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.

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At the beginning, the government prints the money as if it is equivalent to the weight of gold.

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A ten dollar ticket, or paper note, is so denominated because it implies equivalence to a ten dollar gold coin.

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What is a coin weighing one-half an ounce of gold?

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At first, the equivalence is maintained because the government promises redemption of this

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paper ticket in the same weight of gold whenever the ticket is presented to the government's

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treasury.

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A ten-dollar note is pledged to be redeemable in one-half an ounce of gold.

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And at the beginning, if the government has little or no gold on hand, as was the case

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in Massachusetts in 1690, the explicit or implicit pledge is that very soon, in a year

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or two, the tickets will be redeemable in that weight of gold. And if the government

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is still trusted by the public, it might be able at first to pass these notes as equivalent

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to Gold.

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So long as the paper notes are treated on the market as equivalent to gold, the newly

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issued tickets add to the total money supply and also serve to redistribute society's income

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and wealth.

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Thus, suppose that the government needs money quickly for whatever reason.

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It only has a stock of two million dollars in gold on hand.

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It promptly issues five million dollars in paper tickets and spends it for whatever expenditure

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it deems necessary, say in grants and loans to relatives of top government officials.

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Suppose, for example, the total gold stock outstanding in the country is ten million

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dollars, of which two million dollars is in government hands.

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Then the issue of another five million dollars in paper tickets increases the total quantity

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of Money stock in the country by 50 percent. But the new funds are not proportionally distributed.

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On the contrary, the new $5 million goes first to the government, then next to the relatives

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of officials, then to whomever sells goods and services to those relatives and so on.

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If the government falls prey to the temptation of printing a great deal of new money, not

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Not only will prices go up, but the quality of the money will become suspect in that society,

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and the lack of redeemability in gold may lead the market to accelerated discounting

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of that money in terms of gold.

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And if the money is not at all redeemable in gold, the rate of discount will accelerate

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further.

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In the American Revolution, the Continental Congress issued a great amount of non-redeemable

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and gold 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.

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The common phrase, not worth the continental, became part of American folklore as a result of this runaway depreciation and accelerated worthlessness of the continental dollars.