Friday, April 17, 2009

Money - 6. Counterfeiting

Recently, an 83 year old man escaped a prison sentence for helping to forge £8 million. In earlier times, this crime would have cost him his life.

If you decide today that you've had enough, and from tomorrow you're going to make money without regard to the law, how would you do it? How would you get rich quick? With the gateway to criminality open, creating counterfeit cash would surely be your best bet. The advances in and availability of, reproduction technologies have made it easier than it used to be. And now, even if you do get caught, which seems unlikely if you act with due diligence and aren't too greedy, your punishment wouldn't be too severe. It would seem rather harsh for the courts to dish out long sentences to punish culprits for the harm they're doing to the economy. Even the largest most determined counterfeiter would find it hard to match what the banks have done.

When I was growing up, if you decided that you'd had enough, you'd say 'I'm going to rob a bank'. This was an expression of feelings and a statement of intent (albeit one very rarely acted upon) that was socially acceptable. People would react rather differently if you'd said 'I'm going to rob a granny'. In essence the crime is the same, you're taking something that clearly doesn't belong to you. But grannies fit our notion of victim hood, banks do not.

These days, I reckon we should say 'I'm going to print some cash', when we want to express those feelings. Why have any victims at all?

Counterfeit cash has no victims. At least, there are no victims while we maintain the believe that the cash is real. When someone creates a fake £10 note a [false] debt is raised against the Bank of England. But, as long as the bank remains sound, and as long as the note itself is believed to be real, the £10 note functions as well as any other. Assuming the Bank of England can detect the counterfeit it can refuse to honour the £10 debt because it did not create it. So, essentially the counterfeiter has loaned national economy some temporary liquidity at his own risk and at no direct cost to the central bank. In payment of his [illegal] liquidity loan he gets whatever his counterfeit cash can buy him.

This might seem an odd way to look at things. But in the past it might have made more sense. In the days before paper money, Kings and Queens found it expensive to provide coinage for their subjects to use in economic exchange. There was huge demand for coins. To provide them, a King would strike a deal with his minters to share the profit made by 'cheating' the coin out of it's full value of precious metal, by making it lighter than previous issues, or using alloys. Debased coins and counterfeit cash are essentially the same thing. Both provide real liquidity. Its estimated that '1 in 20 £1 coins [in circulation in 2009] are fake'. But a counterfeit £1 is still a real coin; a counterfeit Louis Vuitton handbag, is a fake Louis Vuitton, but its still a real handbag.

Counterfeiters do not create fake money; what they do is make a false claim on the custodianship of money-power. All of us are at least guilty of overstating our money-power at some point in our lives. Banks especially. It comes with the capitalist territory.

The primary claim to the custodianship of money-power comes from the state. The claim the British state makes bears the £ symbol, of course. We know and respect this symbol as a mark of British custodianship of money-power. All claims made with this symbol are, ultimately, subordinate to the British state. The British state's claim is itself subordinate to the world's most powerful symbol. Currently this is $ symbol. All around the world people in their day-to-day lives believe that the paper, duly authorised to bear this symbol, is money (they're wrong of course - its just cash). The custodianship of money-power cannot be maintained without our belief in these symbols. Should that belief waver, the custodians of money-power fight to keep the faith. To this point in history, military strength and money-power have gone hand-in-hand.

This is the power structure that counterfeiters are subverting.

However, the paradox of counterfeiting is that so long as it remains hidden, it actually helps the economy. To damage the reputation of the symbol it mimics, counterfeit cash needs to be recognised as counterfeit. This sets up an interesting dynamic for the State. Its in the State's best interest to keep quiet about the levels of counterfeit currency. And it might actually be better for the economy to have an unnoticed level of counterfeit currency circulating. Liquidity is increased, but central bank debt levels are not.

I'm not suggesting that for you, or me, counterfeiting cash would be a good thing to do. It's fundamentally dishonest; it makes liers of us. But we should try understand it.

Hayek - [you don't know who Hayek was? if Keynes were Jesus, then Hayek is God, and Marx is the Devil, or vice versa, depending on your p.o.v.] - argued that citizens should be free to use and refuse any currencies they wish. He thought that if the state monopoly on money creation was ended we'd be free from cycles of inflation and deflation, so that the unemployment and depression often blamed on capitalism would be cured. He published a paper on it in that special year 1976 (1 + 9 + 7 + 6 = 23). He was quite old by then, so most people just thought he'd gone a bit mad. I think he was on the right track. In fact, I'd go quite a lot further than that.

No quotation for you this time. Instead a link to Lawrence Malkin's site about operation Bernhard. This was a Nazi plan to destroy the British economy by issuing, Malkin estimates, $650 million worth of counterfeit British notes (that's about six or seven billion in today's money). Obviously, it didn't work out too well for the Nazis.

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