Letter: Forging ahead (1976)

Letter to the Editors from the September 1976 issue of the Socialist Standard

Forging ahead

Could you answer the following question: If there was a huge circulation of counterfeit money about, which could not be detected, what effect would it have on the economy?

J. W. Eastwood

London W.2.

Reply:

For the earlier part of your letter (not reproduced here) see the reply to D. J. Underwood, whose letter it closely resembles.

An excess of currency in circulation, made by private enterprise, has the same effect as an officially produced excess: it causes inflation. What you suggest as a hypothesis has happened several times. The outstanding example was “the great Portuguese note trick” of some years ago, when swindlers posing as representatives of the Portuguese government persuaded a British banknote-printing firm to produce an issue of notes for use in a Portuguese colony. In the subsequent action by the government of Portugal it was pointed out that the circulation of the notes had caused economic damage by pushing up prices in the colony.

During wartime, governments have introduced counterfeit notes into opponent countries with the object of causing disruption. The difficulty, as for the private forger, is finding means for the currency to get in circulation in sufficient quantities; the Portuguese swindlers had an accomplice in a bank. However, once notes are printed and accepted there are not separate sets of results for legal and illegal origins. An excess issue of an inconvertible paper currency causes prices to rise, regardless of who did the printing.

Editors.