Who’s the Real Counterfeiter?

The Royal Mint is increasingly wary of criminal gangs copying their efforts. In a sampling of the currency in circulation across Britain in 2008, it was found that one 1 pound coin in every 40 was a fake. While we may conclude that 2.5 percent of the total coins outstanding are counterfeit, we are hard pressed to see what the real problem with these counterfeit coins is.

One immediate problem, for you, I or anyone else who uses one of these coins is that it is illegal. Any person caught submitting a counterfeit coin as payment for a transaction is breaking the law. If 1 in 40 pound coins is counterfeit than you have a 2.5 percent chance of breaking the law every single time you pay for something with a pound. On the plus side, the chances that a Londoner will encounter a counterfeit coin are a little less at only 2.06 percent. The flipside is that the luck of the Northern Irish may soon run out: 2.58 percent of their coins were found to be forgeries.

The Mint notes that the more pressing problem is that if too many counterfeit coins circulate, shopkeepers and businesses could be damaged. If people start losing confidence in the pound, they will quit using it. Indeed, with any currency that is only valued by its legal mandate (i.e., any fiat currency), value is not an intrinsic feature. Instead, value is assigned only to the extent that someone else accepts the money in payment for a debt. If Britons’ faith in the legitimacy of the pound floundered, they would soon stop accepting it and its value would decline accordingly.

Rather than worrying about the petty efforts of a few counterfeiters, perhaps the Mint should turn their attention to the biggest counterfeiter of them all – the Bank of England. While operating under a monopoly grant from the British government, the Bank of England has precious few other differences with these other counterfeiters (at least regarding how they make money). Both groups take something of little worth and change it into something of greater worth. Both groups stand to profit by selling these goods to the public. If a pound takes 50 pence to produce and the Mint sells it for one pound, they make a tidy profit from the deal. The less official counterfeiters are no different.

In 2009 the Bank of England increased not just the number of pound coins outstanding but the larger supply of notes and coins by 4.6 billion pounds. This was an increase of 6.5 percent. An illegal counterfeiter just producing knock-off pound coins would have to produce 145 of them each second for a full year to equal this output. They may be crafty, but I doubt that most counterfeiters are this efficient.

Yet the Bank of England is doing it for the good of the nation. We are in crisis, presumably one of illiquidity, and one solution is to increase the amount of money outstanding. The Bank of England considers it necessary to keep open the monetary spigots in order to keep this economy from lapsing into a much more severe fate. As the saying goes, “The more the merrier.” Mervyn King must think the same applies to pounds.

I didn’t think that one could get too much of a good thing. Given the Mint and the Bank of England’s efforts over the last three years of inflating the money supply, you would think that they would welcome the helping hand from a few mere counterfeiters.