A Nation's Counterfeiters

"These actions furthered blurred the lines between banking and counterfeiting.”

So iterates Stephen Mihm's “A Nation of Counterfeiters” - a book that traces the history of counterfeiting in America. But, although the book traces the lives and livelihoods of many of our nation's foremost counterfeiters, it is about much more than just counterfeiting. It is about money as a product.

Through its pages, we read about not only the problems of counterfeit notes, but counterfeit banks (dubbed wildcat banks.) For it was not uncommon in antebellum America for a group of men (and it was men, women were not yet allowed) to obtain a state charter for a bank, set up the vaults and the printers, take their deposits, print and circulate their currency, make loans, take profits (which they quickly exchanged for the currency of a well-known reputable bank), and then shutter their doors, insolvent. This left ostensibly 'real' tender in circulation that had often less value than a well-executed counterfeit note on a good bank.

Bankers have been earning our ire for 200 years.

We're caught in a double-bind. We need money, and for the money supply to correlate with the demand for goods and services and the productive capability we have to fulfill those goods and services. Although we now have a central printer of actual money, the printing presses of the Federal Reserve are not the only way 'money' as we know it comes into existence.

When a bank takes its deposits, say $10 million, it doesn't lend just $9 million back, but perhaps $90 million – thus creating $80 million dollars. That created money serves a purpose: It is the grease that enables a modern economy to run and expand.

But the unevenness of the money supply vis a vis demand and productive capability is a major factor in creating recessions and depressions – periods of adjustment to re-align production, consumption, and restore faith in the economy and the currency.

It would be fine, I suppose, if after a glut of money, it was bankers and other employees of finance who found themselves looking for new lines of work as their sector contracted. But, as we all know, it is predominantly non-finance people who lose their work as a result of too much money.

We need to acknowledge that losing one's job due to a severe contraction in the economy is not the same as losing one's job due to a lack of diligence or laziness. We should concentrate our ire on those most responsible – those who unreasonably profited while creating more money than the economy could absorb.

So, we have a right to be angry at these modern counterfeiters who devise new ways to create money for their own enrichment. And, just as the movement to a common, Federally executed currency and the creation of the Secret Service to ferret out counterfeiters after the Civil War brought early counterfeiting to heel, perhaps new regulations or stronger leadership at our current regulator (The Federal Reserve itself, Mr. Bernanke!) will even the economy.

Regulating or constraining the actions of some for the greater public good is not a descent into Socialism – it is precisely what good societies do. Antebellum counterfeiting died when the risks outweighed the potential profits. Modern day counterfeiting will, too, but only if we and our rule-makers are willing to restructure the laws governing the world of lending, investing, trading, and finance. Restructure the rules so that individual short term gains cannot be taken against long term risks. Regulate actions and products - just as it is illegal to print your own money, why can't it be illegal to create products (I'm thinking Credit Default Swaps) that mimic money?

We'd like to think that counterfeiting belongs to a time long ago. But, recent events prove otherwise. Until we address its modern forms, we remain A Nation of Counterfeiters.