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authors use it as a synonym for fractional or fiat money to contrast it with commodity money. - Electronic money — For purposes here, money as reduced to an abstract accounting process involving abstract currency-units, or "blips", no longer requiring a physical medium for transfer. It is also called "digital cash" or "cybercash". Depending on backing, it could be receipt, fractional or fiat money. both counterfeiting and publicly owned expansion lead to or, more accurately, cause widespread inflation of prices and, if uncontrolled, destabilisation of the integrity of the overall money system. Often governments have had draconian laws against counterfeiting practices, regarding them as equivalent to acts of sabotage, treason or war. Some wars have actually been waged partly via the very effective technique of one country's counterfeiting another's currency and "buying" (in actuality, confiscating) resources with it. In this sense, it is a camouflaged seizure of assets, or economic warfare. Whereas pillaging is sometimes the goal of warfare, counterfeiting permits an invisible pillaging with no arms or army required! The third case above, privately owned money expansion, is not so sharply delineated in the economics literature or popular treatments and is typically mixed up with the other two cases. This is a catastrophic error, as will be considered below. For reference, call this the cui bono, caveat emptor error (Latin for "Who benefits? Let the buyer beware!"). The above account hides further detail and mixes terminology based on the modern perspective. In basic so-called "economics" history (e.g., as Griffin '* and Rothbard," e.g., explain), money ostensibly ed as receipt money to depositors was often surreptitiously, clandestinely or illicitly corrupted into fractional or fiat money by bankers. The bankers found they could temporarily lend out additional pseudo- certificates exceeding their collected inventory of gold and collect interest on these loans. Rothbard notes that this practice was ruled legal by courts in some historical cases. Griffin asserts this practice invariably leads to an inherently unstable money system and periodic runs on banks, with many historical examples to make his case. Griffin also asserts that fiat money always leads to hyperinflation and worthless currency. These views are reappraised here with slightly different conclusions. ie ete — ne De Two Banking Systems: Central and Noncentral Debasement, Counterfeiting and Embezzlement From the historical standpoint, a nation can have two kinds of Immediately upon any inquiry into banking or money systems: money, the topics of debasement and - Centralised banking — A univer- counterfeiting arise. Someone can sal, standardised, official government take a gold coin, clip or shave it down "By this means, government currency is controlled and issued by a and pass on that coin, or create entirely central bank. fake coins with no gold content. may, secretly and unobserved, - Noncentralised banking - Complicating the picture is that the confiscate the wealth of the Different banks may issue their own government itself may adopt debase- receipt money as currency, also called ment of the currency as an official people, and not one man ina "banknotes". The different banknotes state policy! Many authors have million will detect the theft." circulate simultaneously in the overall blurred these cases. So, a strict defini- economy. tion of these different forms of debase- ment is required: Worldwide, most nations now have - Counterfeiting — The outlawed, their own central banks, at the end of a criminal practice of debasing the cur- long history of complex economic and rency or creating fraudulent money. political events. American and inter- 2 Publicly owned money expansion — At the knowledge, _ national history has involved eras of alternation between cen- — John Maynard Keynes consent and service (and, ultimately, control) of the public tralised and noncentralised banking systems; currently, the US has citizenry, the government systematically but restrictedly devalues centralised banking. the currency by allocating itself ownership of new, previously In the United States, the central bank is known as the Federal unowned/unallocated currency-units (represented by paper Reserve; it was established in 1913. Note that a central bank may banknotes on demand) via the accounting system—implemented be either publicly owned or privately owned. However, despite its as an official policy to generate a revenue stream other than direct. name and management protocols, the US Federal Reserve is taxation, with proceeds spent on legitimate government/public privately owned. The assumption that a central bank is always services. publicly owned is the same cui bono caveat emptor error. - Privately owned money expansion — The situation men- tioned above, where, instead, private bankers retain the sole Seigniorage authority (understood to be officially delegated by the govern- In economics literature, the word "seigniorage" is typically used ment) to control the same currency-unit accounting mechanism as a synonym for money expansion. Seigniorage is revenue or a and own the associated revenue stream, referred to as "profit" or profit taken from the minting of coins, usually the difference "revenue" by the bankers’ terminology (conceivably with a "cut" between the value of the bullion used and the face value of the going to select depositors and shareholders—or none at all). coin. Tn "By this means, government may, secretly and unobserved, confiscate the wealth of the people, and not one man ina million will detect the theft." Seigniorage In economics literature, the word "seigniorage" is typically used as a synonym for money expansion. Seigniorage is revenue or a profit taken from the minting of coins, usually the difference between the value of the bullion used and the face value of the coin. In a fractional money system, the mechanism for money expan- sion is different (not associated with minting coins) but with the same effect. Here, a very careful distinction must be made. The following are separate and distinct, but they are sometimes confused by neophytes or are unclear in some accounts. The terminology is somewhat arbitrary (remarkably, there does not seem to be a standard terminology devised by other commentators). Counterfeiting is equivalent to theft. The criminal obtains tangible assets as booty in the collective robbery of all who use the currency. However, it is not an overt theft that a victim is readily aware of, as it is, say, when their car has been stolen and is missing. Embezzlement is more accurate, presuming it is eventually detected! As is widely understood by economists and the general public, 12 = NEXUS APRIL — MAY 2004 — John Maynard Keynes www.nexusmagazine.com