Most Money is Counterfeit.


The word counterfeit according to dictionaries refers to producing an imitation of something valuable with an intention to defraud. Dollars issued by private banks are certainly imitations of Fed issued dollars. Plus where privately created money is introduced to an economy which has just base money, base money has to be confiscated from households so as to counterbalance the inflationary effect of the new privately created money. I.e. households are defrauded to make room for privately issued money. Ergo the money created by private banks is counterfeit money.

Another flaw in privately created money is that creating it costs almost nothing just as it costs the Fed almost nothing to create dollars. In contrast, under a “base money only” system, private banks have to borrow or earn every dollar they lend out, thus those banks compete on equal terms with other businesses. Thus allowing private money results in the profits of seigniorage subsidizing bank loans, which results in artificially low rate of interest and artificially high levels of debt. That does not maximise GDP.

A third flaw in a private money is thus. Those who deposit money at private banks with a view to earning interest are in effect money lenders: they have entered commerce. But they are guaranteed against loss by taxpayers and it is not normally the job of taxpayers to stand behind commercial ventures. On the other hand everyone is entitled to a totally safe bank account. That conflict is resolved by full reserve banking (a system which bans privately issued money) because under full reserve, zero interest yielding bank accounts are totally safe, while interest earning ones are not.


US dollars, UK pounds and so on are a form of money issued by a national entity known as a central bank. They are what might be called the basic money units, the legal tender that the country chooses to use. That central bank money is often called “base money”.

In addition, there is money issued by private / commercial banks, which actually makes up the bulk of the money supply in most countries.

However, we do not actually need to allow privately issued money, and in fact a number of Nobel laureate economists including Milton Friedman argued for the abolition of private money. (See reference section below for more details).

As to whether private money amounts to counterfeiting, certainly one of the latter Nobel laureates (Maurice Allais) argued that it does. And David Hume, writing over two hundred years ago claimed likewise.

So does the counterfeit charge stand inspection?

Well my Concise Oxford Dictionary (2004 edition) defines counterfeit as “Made in exact imitation of something valuable with the intention to deceive or defraud”. As to “made in imitation”, certainly privately issued dollars, pounds, etc are seen by the public as being basically identical to central bank or “state” issued money. To illustrate, almost anyone, when they borrow $X or £X from a bank is under the impression that the dollars or pounds they then have at their disposal are identical to all intents and purposes to central bank issued dollars or pounds.


As to “with the intention to deceive or defraud”, defrauding is inherent to the issue of private / commercial bank money and for the following reasons.

Assume a “central bank money only” system of the sort advocated by Friedman and others. Assume also that private banks then start issuing money. The effect of this extra money will be stimulatory: it will increase aggregate demand. And assuming the authorities have issued enough base money to keep the economy at capacity, the effect of that private money will be inflationary. Ergo government will have to impose some sort of deflationary measure like raising taxes and thus confiscating central bank money from households and the private sector in general. Alternatively some other way will have to be found to forcefully suppress the purchase of goods and services by the private sector.

Well now that’s essentially what happens when traditional backstreet counterfeiters produce their own home made dollar bills! That is, those counterfeiters spend their money, which raises demand, which forces government to damp down demand, e.g. by confiscating base money from the population! And there is a very good case for saying that forcefully confiscating money from the population to enable someone’s money printing operation to operate equals “defrauding” the population at large, whether we’re talking about respectable private banks or back-street counterfeiters.

Intention to defraud.

A possible defence private bankers could put against the counterfeit charge is that they are not DELIBERATELY robbing households. That is, to quote the above dictionary definition of counterfeiting, there is no “intention” to rob or defraud.

One answer to that is that the more sophisticated or clued up bankers probably know exactly what is going on, while the less clued up ones probably don’t, and thus cannot be accused of the above “intention”.

However, “ignorance of the law is no excuse” as the saying goes. Likewise, ignorance of the facts is no excuse either. To illustrate, if a traditional backstreet counterfeiter is so clueless that he doesn’t realize he is robbing the population at large, does that mean he is not guilty of counterfeiting? Of course not!

So the conclusion of this section is that money issued by private or commercial banks is essentially counterfeit money.

A free market rate of interest is best.

Another reason to ban privately issued money has to do with interest rates.

Under a “base money only” system (sometimes known as “full reserve banking” or “100% reserve banking”) there is no obvious reason why interest rates would not settle down to some sort of free market GDP maximising level. (The normal assumption in economics is that GDP is maximised where goods are sold at the free market price, unless there can be shown to be significant social considerations involve, as is the case for example with kids’ education, which is available for free in most countries.)

In particular, under a base money only system, commercial banks have to obtain money the same way every business and household obtains money, namely earning it or borrowing it. But allowing commercial banks to simply print / create money, lets them obtain money at a lower cost.

Thus private banks are able to undercut existing lenders and get their home made money into the economy. But that artificially cheap way of obtaining money gives private banks an entirely artificial advantage over other businesses and households. Put another way, GDP is maximised where customers pay the full costs of goods and services, not where they are able to obtain goods and services at some sort of artificially cheap price.

Of course it could be argued that the same criticism applies to goods and services supplied by the state which are subsidised by the state’s ability to profit from seigniorage (i.e. money printing). However, that doesn’t matter because we all accept that various goods and services (e.g. law enforcement and education for kids) should be supplied free of charge.

Incidentally, note that when a private bank creates and lends out money, there are of course costs involved, like checking up on the value of collateral offered by borrowers. However, exactly the same costs apply under a base money only system.

In contrast to the cost of checking up on collateral etc, there is the cost of OBTAINING money to lend out. Under a base money only system, banks have to borrow or earn that money, while under the existing system, they can simply create some of the money they lend out from thin air.

Another incidental point here is that George Selgin also claimed that allowing private money in an economy which has hitherto been “base money only” results in private money driving base money to near extinction. But that should not be taken to suggest that Selgin would agree with the basic thrust of this “anti-counterfeit” article.

No more bank failures!

Not only does a base money only system result in higher GDP, but it also makes bank collapses a thing of the past. The reason stems from the fact that money is a short term liability of a bank, whereas banks’ assets (loans to customers) are relatively long term.

“Borrow short and lend long” is always risky: if depositors lose faith in a bank, they withdraw their money and the bank collapses: exactly what has happened to hundreds of banks thru history.

Can all private money actually be suppressed?

The quick answer is “no”. But in fact most of the advocates of full reserve banking do not want to suppress every single dollar of privately issued money. For example most of them do not object to local currencies like Ithaca hours in the US or the Lewis pound in the UK.

If the main source of privately issued money, i.e. the larger regular banks and shadow banks are prevented from issuing money, that cracks the problem basically.

Why should taxpayers have to back private banks?

A final nonsensical aspect of the existing bank system is as follows. 
If you deposit money at a private bank with a view to earning interest, taxpayers guarantee you won’t lose money. In contrast if you deposit money at a non-bank corporation so as to earn interest (e.g. buy those corporations’ bonds) taxpayers certainly don’t stand behind you! There is no good reason for that anomaly. In particular, it’s a widely accepted principle that it is not the job of taxpayers to support COMMERCIAL ventures, and lending your money out so as to earn interest is most definitely a commercial venture.

And under full reserve banking that anomaly is automatically taken care of. That is, under full reserve, zero interest earning accounts are safe, while there is no taxpayer funded protection for interest earning accounts. That basic principle applies to most of variations on the full reserve theme — advocated for example Laurence Kotlikoff, Positive Money and so on.

The latter difference in treatment for interest earning and non-interest earning accounts is also inherent to Friedman’s full reserve system and to the new rules governing money market mutual funds in the US, though the distinction between those two sorts of accounts is more blurred in the case of Friedman and the new mutual fund rules: not an aspect of the latter two systems I like.

Having argued that there is no good reason for taxpayers to have to make interest earning bank accounts safe, it might not be immediately apparent why it makes sense under full reserve to have totally safe zero-interest earning accounts. Well I suggest the reason is that the availability of a totally safe bank account is a basic human right, plus that is a type of account that many businesses find useful.

That’s not to argue that totally safe accounts should be made available for free: it’s fair enough to charge customers for them. But the charge ought to minimal given that such accounts are GENUINELY safe because deposits are simply warehoused rather than loaned on.

Deposit insurance.

Of course it could be claimed that the risks of “borrow short and lend long” can be covered by government run deposit insurance systems, and that those insurance systems are acceptable where they pay for themselves. However, that claim is a joke.

It’s true that the FDIC in the US pays for itself, but the FDIC does not cover large banks, and in the recent crisis, the Fed had to lend billions to private banks at a near zero rate of interest.

There has been a long history of bankers cajoling or bribing politicians into granting special favours to private banks. Thus the idea that taxpayer support for private banks will ever be done on a strictly commercial basis is, to repeat, a joke. As Senator Dick Durbin put it, “Banks are still the most powerful lobby on Capitol Hill . . . . . and frankly they own the place”.


Allais, Maurice. See opening sentences of the abstract of Ronnie Phillips’s paper. “Credit Markets and Narrow Banking”.

Friedman, Milton. See his book “A Program for Monetary Stability”, in particular 2nd half of Ch3.

Hume, David. See his work “On Money”, para II.III.4.

Kotlikoff, Laurence. “The Economic Consequences of the Vickers Commission” published by Civitas. But note that Kotlikoff has plenty of other published material on the subject of full reserve banking.

Positive Money. “Towards a 21st Century Banking and Monetary System”. That Positive Money work linked to in the main text above is actually a joint effort by several authors: Ben Dyson (who founded Positive Money), Tony Greenham, Josh Ryan-Collins and Richard Werner. Also Positive Money and Ben Dyson have published a large number of other works spelling out the same message as the latter “joint” work.

Selgin, George. See his Capitalism Magazine article “Is Fractional –Reserve Banking Inflationary”. Note that Selgin does not spell out as many details on exactly how privately issued money drives base money to near extinction as are set out in the above “counterfeit” article, but never mind. Also, Selgin’s starting assumptions are slightly different to mine: he assumes that government’s reaction to allowing private money is simply to let inflation rip. In contrast, I assume government CONTROLS that inflation. But the end result is the same: private money displaces publically issued money.