WEBVTT NOTE Monetary Inflation and Counterfeiting 1 00:00:00.000 --> 00:00:04.000 Monetary Inflation and Counterfeiting 2 00:00:04.000 --> 00:00:09.000 Suppose that a precious metal such as gold becomes a society's money, 3 00:00:09.000 --> 00:00:16.000 and a certain weight of gold becomes the currency unit in which all prices and assets are reckoned. 4 00:00:16.000 --> 00:00:22.000 Then, so long as the society remains on this pure gold or silver standard, 5 00:00:22.000 --> 00:00:30.000 In the gold standard, there will probably be only gradual annual increases in the supply of money from the output of gold mines. 6 00:00:31.000 --> 00:00:36.000 The supply of gold is severely limited and it is costly to mine further gold. 7 00:00:37.000 --> 00:00:46.000 And the great durability of gold means that any annual output will constitute a small portion of the total gold stock accumulated over the centuries. 8 00:00:46.000 --> 00:00:52.000 The currency will remain of roughly stable value in a progressing economy. 9 00:00:52.000 --> 00:00:59.000 The increased annual production of goods will more than offset the gradual increase in the money stock. 10 00:00:59.000 --> 00:01:10.000 The result will be a gradual fall in the price level, an increase in the purchasing power of the currency unit or gold ounce year after year. 11 00:01:10.000 --> 00:01:23.000 The gently falling price level will mean a steady annual rise in the purchasing power of the dollar or franc, encouraging the saving of money and investment in future production. 12 00:01:23.000 --> 00:01:33.000 A rising output and falling price level signifies a steady increase in the standard of living for each person in society. 13 00:01:33.000 --> 00:01:40.000 Typically, the cost of living falls steadily while money wage rates remain the same, meaning 14 00:01:40.000 --> 00:01:46.920 that real wage rates or the living standards of every worker increase steadily year by 15 00:01:46.920 --> 00:01:49.080 year. 16 00:01:49.080 --> 00:01:54.400 We are now so conditioned by permanent price inflation that the idea of prices falling 17 00:01:54.400 --> 00:02:00.760 every year is difficult to grasp, and yet prices generally fell every year from the 18 00:02:00.760 --> 00:02:18.760 The beginning of the Industrial Revolution in the latter part of the 18th century, until 1940, with the exception of periods of major war, when the governments inflated the money supply radically and drove up prices, after which they would gradually fall once more. 19 00:02:18.760 --> 00:02:29.760 We have to realize that falling prices did not mean depression, since costs were falling due to increased productivity, so that profits were not sinking. 20 00:02:29.760 --> 00:02:36.200 If we look at the spectacular drop in prices, in real, even more than in money terms, in 21 00:02:36.200 --> 00:02:43.600 recent years in such particularly booming fields as computers, calculators and TV sets, 22 00:02:43.600 --> 00:02:49.760 we can see that falling prices by no means have to connote depression. 23 00:02:49.760 --> 00:02:56.560 But let us suppose that in this idle of prosperity, sound money and successful monetary calculation, 24 00:02:56.560 --> 00:03:03.760 A serpent appears in Eden, a temptation to counterfeit, to fashion a near-valueless object 25 00:03:03.760 --> 00:03:08.720 so that it would fool people into thinking it was the money commodity. 26 00:03:08.720 --> 00:03:12.000 It is instructive to trace the result. 27 00:03:12.000 --> 00:03:16.960 Counterfeiting creates a problem to the extent that it is successful, that is, to the extent 28 00:03:16.960 --> 00:03:23.000 that the counterfeit is so well-crafted that it is not found out. 29 00:03:23.000 --> 00:03:28.200 Suppose that Joe Dokes and his merry men have invented a perfect counterfeit. 30 00:03:28.200 --> 00:03:34.280 Under gold standard, a brass or plastic object that would look exactly like a gold coin. 31 00:03:34.280 --> 00:03:40.520 Or, in the present paper money standard, a ten dollar bill that exactly simulates a ten 32 00:03:40.520 --> 00:03:43.060 dollar Federal Reserve note. 33 00:03:43.060 --> 00:03:44.960 What would happen? 34 00:03:44.960 --> 00:03:49.560 In the first place, the aggregate money supply of the country would increase by the amount 35 00:03:49.560 --> 00:03:51.080 counterfeited. 36 00:03:51.080 --> 00:03:58.040 Equally important, the new money will appear first in the hands of the counterfeiters themselves. 37 00:03:58.040 --> 00:04:02.680 Counterfeiting, in short, involves a two-fold process, one, increasing the total supply 38 00:04:02.680 --> 00:04:08.480 of money, thereby driving up the prices of goods and services and driving down the purchasing 39 00:04:08.480 --> 00:04:15.360 power of the money unit, and two, changing the distribution of income and wealth by putting 40 00:04:15.360 --> 00:04:20.600 disproportionately more money into the hands of the counterfeiters. 41 00:04:20.600 --> 00:04:25.600 The first part of the process, increasing the total money supply in the country, was 42 00:04:25.600 --> 00:04:32.120 the focus of the quantity theory of the British classical economist from David Hume to Ricardo, 43 00:04:32.120 --> 00:04:37.520 and continues to be the focus of Milton Friedman and the monetarist Chicago School. 44 00:04:37.520 --> 00:04:43.260 David Hume, in order to demonstrate the inflationary and non-productive effect of paper money, 45 00:04:43.260 --> 00:04:50.560 in effect postulated what I like to call the Angel Gabriel model, in which the angel, out 46 00:04:50.560 --> 00:04:56.740 After hearing, please, for more money, magically doubled each person's stock of money overnight. 47 00:04:56.740 --> 00:05:03.200 In this case, the angel Gabriel would be the counterfeiter, albeit for benevolent motives. 48 00:05:03.200 --> 00:05:09.920 It is clear that while everyone would be euphoric from their seeming doubling of monetary wealth, 49 00:05:09.920 --> 00:05:13.280 society would in no way be better off. 50 00:05:13.280 --> 00:05:20.480 For there would be no increase in capital or productivity or supply of goods. 51 00:05:20.480 --> 00:05:25.620 As people rushed out and spent the new money, the only impact would be an approximate doubling 52 00:05:25.620 --> 00:05:31.440 of all prices, and the purchasing power of the dollar or franc would be cut in half, 53 00:05:31.440 --> 00:05:35.560 with no social benefit being conferred. 54 00:05:35.560 --> 00:05:42.720 An increase of money can only dilute the effectiveness of each unit of money. 55 00:05:42.720 --> 00:05:48.780 Milton Friedman's more modern, though equally magical, version is that of his helicopter 56 00:05:48.780 --> 00:05:54.140 Effect, in which he postulates that the annual increase of money created by the Federal Reserve 57 00:05:54.140 --> 00:06:00.780 is showered on each person proportionately to his current money stock by magical governmental 58 00:06:00.780 --> 00:06:03.580 helicopters. 59 00:06:03.580 --> 00:06:09.200 While Hume's analysis is perceptive and correct so far as it goes, it leaves out the 60 00:06:09.200 --> 00:06:15.980 vital redistributive effect. Friedman's Helicopter Effect seriously distorts the analysis by 61 00:06:15.980 --> 00:06:23.640 by being so constructed that redistributive effects are ruled out from the very beginning. 62 00:06:23.640 --> 00:06:28.780 The point is that while we can assume benign motives for the Angel Gabriel, we cannot make 63 00:06:28.780 --> 00:06:33.500 the same assumption for the counterfeiting government or the Federal Reserve. 64 00:06:33.500 --> 00:06:39.460 Indeed, for any earthly counterfeiter, it would be difficult to see the point of counterfeiting 65 00:06:39.460 --> 00:06:44.660 if each person is to receive the new money proportionately. 66 00:06:44.660 --> 00:06:52.220 In real life, then, the very point of counterfeiting is to constitute a process, a process of transmitting 67 00:06:52.220 --> 00:06:58.880 new money from one pocket to another and not the result of a magical and equi-proportionate 68 00:06:58.880 --> 00:07:03.620 expansion of money in everyone's pocket simultaneously. 69 00:07:03.620 --> 00:07:09.740 Whether counterfeiting is in the form of making brass or plastic coins that simulate gold 70 00:07:09.740 --> 00:07:15.220 or of printing paper money to look like that of the government, counterfeiting is always 71 00:07:15.220 --> 00:07:21.420 a process in which the counterfeiter gets the new money first. 72 00:07:21.420 --> 00:07:26.760 This process was encapsulated in an old New Yorker cartoon in which a group of counterfeiters 73 00:07:26.760 --> 00:07:31.720 are watching the first ten dollar bill emerge from their home printing press. 74 00:07:31.720 --> 00:07:38.480 One remarks, boy, is retail spending in the neighborhood in for a shot in the arm. 75 00:07:38.480 --> 00:07:44.080 And indeed it was. The first people who get the new money are the counterfeiters, which 76 00:07:44.080 --> 00:07:49.840 they then use to buy various goods and services. The second receivers of the new money are 77 00:07:49.840 --> 00:07:55.520 the retailers who sell those goods to the counterfeiters and on and on the new money 78 00:07:55.520 --> 00:08:02.000 ripples out through the system going from one pocket or till to another. As it does 79 00:08:02.000 --> 00:08:08.480 And so, there is an immediate redistribution effect. For first, the counterfeiters, then 80 00:08:08.480 --> 00:08:15.600 the retailers and so forth, have new money and monetary income which they use to bid 81 00:08:15.600 --> 00:08:21.880 up goods and services, increasing their demand and raising the prices of the goods that they 82 00:08:21.880 --> 00:08:27.720 purchase. But as prices of goods begin to rise in response to the higher quantity of 83 00:08:27.720 --> 00:08:33.120 Money, those who haven't yet received the new money find the prices of the goods they 84 00:08:33.120 --> 00:08:39.540 buy have gone up, while their own selling prices or incomes have not risen. 85 00:08:39.540 --> 00:08:44.920 In short, the early receivers of the new money in this market chain of events gain at the 86 00:08:44.920 --> 00:08:51.140 expense of those who receive the money toward the end of the chain, and still worse losers 87 00:08:51.140 --> 00:08:52.740 are the people. 88 00:08:52.740 --> 00:08:58.260 For example, those on fixed incomes such as annuities, interest or pensions who never 89 00:08:58.260 --> 00:09:01.500 receive the new money at all. 90 00:09:01.500 --> 00:09:08.100 Monetary inflation then acts as a hidden tax by which the early receivers expropriate, 91 00:09:08.100 --> 00:09:11.500 that is, gain at the expense of, the late receivers. 92 00:09:11.500 --> 00:09:15.900 And of course, since the very earliest receiver of the new money is the counterfeiter, the 93 00:09:15.900 --> 00:09:19.060 counterfeiter's gain is the greatest. 94 00:09:19.060 --> 00:09:24.580 This tax is particularly insidious because it is hidden, because few people understand 95 00:09:24.580 --> 00:09:31.020 the processes of money and banking, and because it is all too easy to blame the rising prices 96 00:09:31.020 --> 00:09:38.380 or price inflation caused by the monetary inflation on greedy capitalists, speculators, 97 00:09:38.380 --> 00:09:44.140 wild spending consumers, or whatever social group is the easiest to denigrate. 98 00:09:44.140 --> 00:09:59.140 Obviously, too, it is to the interest of the counterfeiters to distract attention from their own crucial role by denouncing any and all other groups and institutions as responsible for the price inflation. 99 00:09:59.140 --> 00:10:12.140 The inflation process is particularly insidious and destructive because everyone enjoys the feeling of having more money, while they generally complain about the consequences of more money, namely higher prices. 100 00:10:12.140 --> 00:10:32.140 But since there is an inevitable time lag between the stock of money increasing and its consequence in rising prices, and since the public has little knowledge of monetary economics, it is all too easy to fool it into placing the blame on shoulders far more visible than those of the counterfeiters. 101 00:10:32.140 --> 00:10:50.140 The big error of all quantity theorists from the British classicist to Milton Friedman is to assume that money is only a veil and that increases in the quantity of money only have influence on the price level or on the purchasing power of the money unit. 102 00:10:50.140 --> 00:11:14.140 On the contrary, it is one of the notable contributions of Austrian School economists and their predecessors, such as the early 18th century Irish-French economist Richard Cantillon, that in addition to this quantitative, aggregative effect, an increase in the money supply also changes the distribution of income and wealth. 103 00:11:14.140 --> 00:11:34.140 The ripple effect also alters the structure of relative prices, and therefore of the kinds and quantities of goods that will be produced, since the counterfeiters and other early receivers will have different preferences in spending patterns from the late receivers who are taxed by the earlier receivers. 104 00:11:34.140 --> 00:11:53.140 Furthermore, these changes of income distribution, spending, relative prices and production will be permanent and will not simply disappear as the quantity theorists blithely assume when the effects of the increase in the money supply will have worked themselves out. 105 00:11:53.140 --> 00:12:05.140 In sum, the Austrian insight holds that counterfeiting will have far more unfortunate consequences for the economy than simple inflation of the price level. 106 00:12:05.140 --> 00:12:16.140 There will be other and permanent distortions of the economy away from the free market pattern that responds to consumers and property rights holders in the free economy. 107 00:12:16.140 --> 00:12:22.140 This brings us to an important aspect of counterfeiting which should not be overlooked. 108 00:12:22.140 --> 00:12:38.140 In addition to its more narrowly economic distortion and unfortunate consequences, counterfeiting gravely cripples the moral and property rights foundation that lies at the base of any free market economy. 109 00:12:38.140 --> 00:12:47.140 Thus, consider a free market society where gold is the money. In such a society, one can acquire money in only three ways. 110 00:12:47.140 --> 00:13:02.140 a. by mining more gold, b. by selling a good or service in exchange for gold owned by someone else, or c. by receiving the gold as a voluntary gift or bequest from some other owner of gold. 111 00:13:02.140 --> 00:13:10.140 Each of these methods operates within a principle of strict defense of everyone's right to his private property. 112 00:13:10.140 --> 00:13:38.140 But say a counterfeiter appears on the scene. By creating fake gold coins, he is able to acquire money in a fraudulent and coercive way, and with which he can enter the market to bid resources away from legitimate owners of gold. In that way, he robs current owners of gold just as surely and even more massively than if he burglarized their homes or safes. 113 00:13:38.140 --> 00:13:54.140 For this way, without actually breaking and entering the property of others, he can insidiously steal the fruits of their productive labor and do so at the expense of all holders of money and especially the later receivers of the new money. 114 00:13:54.140 --> 00:14:02.220 Money, counterfeiting therefore is inflationary, redistributive, distorts the economic system 115 00:14:02.220 --> 00:14:09.420 and amounts to stealthy and insidious robbery and expropriation of all legitimate property 116 00:14:09.420 --> 00:14:11.100 owners in society.