# THE SUPPLY OF GOLD AND THE COUNTERFEITING PROCESS - The Mystery of Banking

Under a gold standard, where the supply of money is the total weight of available gold coin or bullion, there is only one way to increase the supply of money: digging gold out of the ground. An individual, of course, who is not a gold miner can only acquire more gold by buying it on the market in exchange for a good or service; but that would simply shift existing gold from seller to buyer.

How much gold will be mined at any time will be a market choice determined as in the case of any other product: by estimating the expected profit. That profit will depend on the monetary value of the product compared to its cost. Since gold is money, how much will be mined will depend on its cost of production, which in turn will be partly determined by the general level of prices. If overall prices rise, costs of gold mining will rise as well, and the production of gold will decline or perhaps disappear all together. If, on the other hand, the price level falls, the consequent drop in costs will make gold mining more profitable and increase supply.

It might be objected that even a small annual increase in gold production is an example of free market failure. For if any M is as good as any other, isn’t it wasteful and even inflationary for the market to produce gold, however small the quantity?

But this charge ignores a crucial point about gold (or any other money-commodity). While any increase in gold is indeed useless from a monetary point of view, it will confer a non monetary social benefit. For an increase in the supply of gold or silver will raise its supply, and lower its price, for consumption or industrial uses, and in that sense will confer a net benefit to society.

There is, however, another way to obtain money than by buying or mining it: counter feiting. The counterfeiter mints or produces an inferior object, say brass or plastic, which he tries to palm off as gold. That is a cheap, though fraudulent and illegal way of producing “gold” without having to mine it out of the earth.

Counterfeiting is of course fraud. When the counterfeiter mints brass coins and passes them off as gold, he cheats the seller of whatever goods he purchases with the brass. And every subsequent buyer and holder of the brass is cheated in turn. But it will be instructive to examine the precise process of the fraud, and see how not only the purchasers of the brass but everyone else is defrauded and loses by the counterfeit.

Let us compare and contrast the motives and actions of our counterfeiter with those of our good Angel Gabriel. For the Angel was also a counterfeiter, creating money out of thin air, but since his motives were the purest, he showered his misconceived larges sequally (or equi-proportionately) on one and all. But our real world counterfeiter is all too different. His motives are the reverse of altruistic, and he is not worried about overall social benefits.

The counterfeiter produces his new coins, and spends them on various goods and services. A New Yorker cartoon of many years ago highlighted the process very well. A group of counterfeiters are eagerly surrounding a printing press in their basement when the first $10 bill comes off the press. One counterfeiter says to his colleagues: “Boy, retail spending in the neighborhood is sure in for a shot in the arm.” As indeed it was. Let us assume that the counterfeiting process is so good that it goes undetected, and the cheaper coins pass easily as gold. What happens? The money supply in terms of dollars has gone up, and therefore the price level will rise. The value of each existing dollar has been diluted by the new dollars, there by diminishing the purchasing power of each old dollar. So we see right away that the inflation process—which is what counterfeiting is—injures all the legitimate, existing dollar-holders by having their purchasing power diluted. In short, counterfeiting defrauds and injures not only the specific holders of the new coins but all holders of old dollars—meaning, everyone else in society. But this is not all: for the fall in PPM does not take place overall and all at once, as it tends to do in the Angel Gabriel model. The money supply is not benevolently but foolishly showered on all alike. On the contrary, the new money is injected at a specific point in the economy and then ripples through the economy in a step-by-step process. Let us see how the process works. Roscoe, a counterfeiter, produces$10,000 of fake gold coins, worth only a fraction of that amount, but impossible to detect. He spends the \$10,000 on a Chevrolet. The new money was first added to Roscoe’s money stock, and then was transferred to the Chevy dealer. The dealer then takes the money and hires an assistant, the new money stock now being transferred from the dealer to the assistant. The assistant buys household appliances and furniture, there by transferring the new money to those sellers, and so forth. In this way, new money ripples through the economy, raising demand curves as it goes, and there by raising individual prices. If there is a vast counterfeiting operation in Brooklyn, then the money supply in Brooklyn will rise first, raising demand curves and prices for the products there. Then, as the money ripples outward, other money stocks, demand curves, and prices will rise.

Thus, in contrast to the Angel Gabriel, there is no single overall expansion of money, and hence no uniform monetary and price inflation. Instead, as we saw in the case of the early spenders, those who get the money early in this ripple process benefit at the expense of those who get it late or not at all. The first producers or holders of the new money will find their stock increasing before very many of their buying prices have risen. But, as we go down the list, and more and more prices rise, the people who get the money at the end of the process find that they lose from the inflation. Their buying prices have all risen before their own incomes have had a chance to benefit from the new money. And some people will never get the new money at all:either because the ripple stopped, or because they have fixed incomes—from salaries or bond yields, or as pensioners or holders of annuities.

Counterfeiting, and the resulting inflation, is therefore a process by which some people—the early holders of the new money—benefit at the expense of (i.e., they expropriate) the late receivers. The first, earliest and largest net gainers are, of course,the counterfeiters themselves.

Thus, we see that when new money comes into the economy as counterfeiting, it is a method of fraudulent gain at the expense of the rest of society and especially of relatively fixed income groups. Inflation is a process of subtle expropriation, where the victims understand that prices have gone up but not why this has happened. And the inflation of counterfeiting does not even confer the benefit of adding to the non monetary uses of the money commodity.

Government is supposed to apprehend counterfeiters and duly break up and punish their operations. But what if government itself turns counterfeiter? In that case, there is no hope of combating this activity by inventing superior detection devices. The difficulty is far greater than that. The governmental counterfeiting process did not really hit its stride until the invention of paper money.