Legalizing falsifications of bank reserves; the ethics of legalizing falsifications

The Ethics of Money Production, pp. 109-113,

Legalized Falsifications


Above we have discussed how inflation can be created

independent of government, namely, through the

“private” falsification of money certificates. Such

inflation, albeit widespread, is negligible from a quantitative

point of view when compared to fiat inflation. The reason, as

we have argued above, is that there are powerful forces at

work to contain private falsification within fairly narrow limits.

First, falsifying money certificates is a tort, and counterfeiting

(intentional falsification) is a criminal activity punishable

by law. Second, once a falsification has been discovered,

the market participants are likely to abandon the use of the

false certificates and begin to use other ones. Third, in the

worst of all cases, the market participants can demand payments

in bullion and verify the fine content of metal by themselves.

The legalization of false certificates removes the first of

these three limitations. “Legalization” can mean that the

government declares a debased coin—or a fractional-reserve

banknote—to be a means of payment that every creditor is

legally obliged to accept at par; we will deal with this case in

some detail.

But the legalization of false certificates can also come in a

more elementary form, namely, when the government

becomes agnostic about the language of the country and thus

refuses to enforce the laws. For example, it might adopt the


point of view that the expression “one ounce of gold” is really

just a string of letters that can be given just about any contractually

binding meaning. It would follow that a mint can legally

issue coins that feature the imprint “one ounce of gold,” but

which in fact contain just half an ounce, or no gold at all. The

government could also adopt such an agnostic point of view

vis-à-vis banknotes; or at least it could use ambiguous imprints

such as the famous “promise to pay.”1 All such policies legalize

false money certificates, if not in intention, then at least in

fact. The present chapter deals with such cases.

First of all, let us observe that the government’s agnosticism

in these matters has in all known cases been rather selfserving.

The legalization of false certificates usually occurred

after the government itself had already debased the currency

or because it planned to debase it, or because it sought to

obtain credit from fractional-reserve banks. The result is

always the same: counterfeiting henceforth goes unpunished,

and thus the material incentives of counterfeiting develop a

greater inflationary potential.

However, as we have noticed above, on an otherwise free

market such policies very quickly lead to some sort of a correction

through the remaining liberty of action. The citizens,

cautious of the widespread falsifications and weary of the

constant inflation under their laws, would start using money

certificates that are produced abroad. Rather than using, say,

the “coronas” produced by their own prince, they might start

using the “ducats” of the neighboring country, where the falsification

of certificates is still a legal offense. In short, laws

that legalize false money create more inflation than would

otherwise have existed; but per se they do not open the floodgates.

However harmful and morally offensive such legislation

might be, it cannot create large-scale fiat inflation.

 1There is of course no such thing as a “false certificate” or an “ambiguous

certificate” once the premise is accepted that words have no objective

meaning. For the sake of our readers, who on the preceding pages

have discerned meaning where others might just see strings of letters, or

black points on white paper, we will nevertheless continue to speak of

false certificates and ambiguous meanings.


Quite to the contrary, we should rather expect such legislation

to have some deflationary effect. The reason is that the

production of debased coins, even though it is now legal,

takes time. It is impossible for the government (or for that

matter, for any other private agency) to replace the entire

existing stock of coins in one stroke. It follows that the gradual

introduction of the new debased coins makes the supply

of these coins heterogeneous. Old sound coins circulate side

by side with new debased coins. When the market participants

realize what is happening, they will spend much more

time distinguishing between old and new coins; or they might

just as well hoard the old coins, or sell them abroad, and use

only new coins for payments. But this means a more or less

drastic reduction of the coin supply available for exchanges—

fiat deflation. Again, this effect is likely to be dampened

through the remaining liberty of action. As long as the competitive

production of money certificates is still possible, the

fiat deflation can be contained within fairly narrow limits.

One thing is sure, however: The legalization of false certificates

permanently increases the risk of being cheated in

monetary exchanges. Nicholas Oresme wrote: “And so there

is no certainty in a thing in which certainty is of the highest

importance, but rather uncertain and disordered confusion, to

the prince’s reproach.”2 Substitute the word government for

the word prince, and we have an accurate description of the

fact.3 Oresme also noted that official debasement would invite

foreign counterfeiters to seize the opportunity presented by

2Nicholas Oresme, “Treatise on the Origin, Nature, Law, and Alterations

of Money,” in Charles Johnson, ed., The De Moneta of Nicholas Oresme and

English Mint Documents (London: Thomas Nelson and Sons, 1956), p. 31.

3Buridan argued that the word “prince” is to be understood in such context,

not in the sense of a single ruler, but as referring to all those who

have the power to govern. See John Buridan, “Extrait des ‘Questions sur

la Politique d’Aristote’,” book 1, question 11 in Claude Dupuy, ed., Traité

des monnaies et autres écrits monétaires du XIVe siècle (Lyon: La manufacture,

1989), p. 138.


the general confusion over the debased coinage “and thus rob

the king of the profit which he thinks he is making.”4


We have emphasized that the legalization of false money

certificates, though harmful, is virtually insignificant from a

quantitative point of view, at least in comparison to the inflationary

impact of legal monopolies and legal tender laws.

Nevertheless this privilege is fundamental because it is the

foundation of all other monetary privileges. It would seem

impossible, for example, to establish legal tender laws in favor

of some debased coin, or of some fractional-reserve banknote,

if the latter are per se illegal. And thus it follows that the moral

case for all other monetary privileges depends on the morality

of legalized falsifications.

Nicholas Oresme described the moral character of this

practice in no uncertain terms. It was for him a matter of

course that imprints on a coin should be truthful (according to

the Ninth Commandment). To provide a justification for the

practice of falsifying money certificates was impossible. The

government could claim no exception. Quite to the contrary,

Oresme thought that the falsification of money certificates

was particularly offensive in this case. He said:

. . . it is exceedingly detestable and disgraceful in a prince to

commit fraud, to debase his money, to call what is not gold,

gold, and what is not a pound, a pound, and so forth. . . .

Besides, it is his duty to condemn false coiners. How can he

blush deep enough, if that be found in him which in another

he ought to punish by a disgraceful death?5

As a confessor of the powerful, Oresme knew only too

well the temptation of inflation. He therefore did not limit his

admonition to the case of falsification, but condemned any

alteration of existing monies whatsoever. More precisely,

4Oresme, “Treatise,” p. 32.

5Ibid., p. 30.


Oresme charged that the government should never alter

money, because the legitimacy of the alteration of money

made a tyrannous government perfect. To be licit, alterations

of coins needed the consent of the entire community of money

users, and even in this case consent would not automatically

provide legitimacy to the policy (for example, he argued that

money should never be debased for regular revenue purposes).

Only if the alteration provided the only means to deal

with an emergency situation, such as a sudden attack by an

overwhelming enemy, could it be licit, provided it had the

consent of the entire community. Oresme also observed that

the pope will never grant the privilege of altering money; and

that, even if it were granted as an exception, it could always

be revoked.6

6See ibid., chaps. 14, 15, and 24. On the essentially identical position of

the late-scholastic authors Tomás de Mercado and Juan de Mariana, see

Alejandro Chafuen, A., Faith and Liberty: The Economic Thought of the Late

Scholastics, 2nd ed. (New York: Lexington Books, 2003), pp. 65–68.



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