Legalized Counterfitting
Counterfitters are generally reviled and for good reason.
One reason that gold and silver make good monies is that they are easily recognizable
and are particularly difficult to simulate by counterfits.
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.
and Property. Historically, there have been two major kinds of legalized counterfeiting.
One is government paper money. Under gold standard, say that the currency unit in a
society has become one dollar, defined as one twentieth of an ounce of gold. At first,
coins are minted with a certified weight of gold. Then, at one point, the first time in
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.
What is a coin weighing one-half 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 one-half 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 two million dollars in gold on hand.
It promptly issues five million dollars 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 ten million
dollars, of which two million dollars is in government hands.
Then the issue of another five million dollars in paper tickets increases the total quantity
of Money stock in the country by 50 percent. But the new funds are not proportionally 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
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
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.
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.