The Mystery of Banking

counterfeiting
. The counterfeiter mints or pro-
duces an inferior object, say brass or plastic, which he tries to
palm off as gold.
6
That is a cheap, though fraudulent and illegal
way of producing “gold” without having to mine it out of the
earth. 
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The Mystery of Banking
6
One reason for gold’s universal acceptance as money on the free mar-
ket is that gold is very difficult to counterfeit: Its look, its sound as a coin,
are easily recognizable, and its purity can be readily tested.
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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 subse-
quent 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 largess
equally (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 counter-
feiters 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 exist-
ing dollar has been diluted by the new dollars, thereby diminish-
ing 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 hold-
ers of old dollars—meaning, everyone else in society. 
But this is not all: for the fall in PPM does not take place over-
all and all at once, as it tends to do in the Angel Gabriel model.
The money supply is not benevolently but foolishly showered on
The Supply of Money
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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 assis-
tant buys household appliances and furniture, thereby transfer-
ring 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 thereby raising individual prices. If there is a vast coun-
terfeiting 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 over-
all 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