14. The (Non-Government) Counterfeiter

0:00PART 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.

0:48This 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.

1:47The 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.

2:46But 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.

3:41Since 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.

4:35They 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

5:47receive 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.

6:36There 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.

7:31Instead, 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.

8:23If 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.

9:26The 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.

10:17He 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.

11:09Consider 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.

11:55Under 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.

12:46It 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.

13:34The 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.

14:28Without 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.

15:17But 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.

16:07The 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.

16:54But 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.

17:39The 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

19:02Forever. 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.

19:58In 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.

20:43They 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.

21:32An 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.

22:30The 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.

23:24Attempting 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.

24:13On 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.

24:58There 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.

25:58The 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.

26:48They 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.