It was a massive counterfeiting workshop, an entire shadow mint in North London, nothing like anything detectives had ever seen before when they discovered it in 2007. A man named Marcus Glindon had produced millions of false £1 coins there over several years after losing his previous job as an engineer, police said. Glindon, then 37, was sentenced to five years in prison. The financial crisis followed shortly, and then the excruciatingly slow recovery. To central bankers around the world, Glindon might have seemed less like a villain than like a superhero languishing in confinement (had they known who he was). For his lawbreaking had accomplished a task that would demand central bankers’ utmost ingenuity and resourcefulness in those years: He’d expanded the money supply.
Some 45 million fake £1 coins are now in circulation, according to the Royal Mint. That’s about 3 percent of the total. Yet if there is anyone out there today following in Glindon’s footsteps, their work could soon become much more difficult. Chancellor of the Exchequer George Osborne revealed the proposed design for a shiny new £1 coin Wednesday. And it is very shiny, as shown in the animation above from the Mint. The coin is 12-sided, unlike the current round coin. It is made from two differently colored alloys and includes a security technology that the Mint refers to as iSIS. (Apparently, the Royal Mint do not watch “Archer.”)
Yet retrofitting vending machines and parking meters around the country to accept the dodecagonal coins will cost as much as £20 million pounds, a figure that does not include the cost of new design. Since no currency, no matter how sophisticated, can completely eliminate the possibility of fraudulence, is the new British £1 coin worth the expense? And more broadly, should the British really be concerned about the debasement of their currency? Answering these questions requires thinking carefully about the structure of the economy and the nature of money.
Imagine a society in which every person and every piece of equipment is employed in some kind of useful activity. In this society, no one is sitting on the couch all day, and no factories are vacant for lack of business. Economists say that a society in this situation is at capacity. When a society is at or near capacity, a counterfeiter is truly a thief. She can get what she wants for nothing, and there will be nothing left over for those who earned their money. By more readily paying for more expensive goods and services, counterfeiters contribute to rising prices for everyone.
On the other hand, when the economy is not at capacity, counterfeiting doesn’t look so bad. The counterfeiter might buy an apple, say, without spending any real money. But there will be more apples left in the bushel for me when I want to buy one. And if there aren’t, perhaps there is a warehouse full of apples somewhere that a farmer hasn’t bothered to haul to market for lack of demand. I can’t really claim that the counterfeiter is harming me at all. The grocer won’t increase his prices very much if he has more apples to sell, since he will want to sell them to me at a price I can afford.
Counterfeiting is not simply a victimless crime in these conditions. It could conceivably be a service to society at large. The counterfeiter pays the grocer, who pays the farmer, who might be able to hire new employees or invest in new equipment, and everyone is better off.
Libertarian critics of former Federal Reserve Chairman Ben Bernanke often complain that his response to the financial crisis was simply to print money. In a sense, that’s correct. Under Bernanke, the central bank engaged in a program called quantitative easing to flood the depressed economy with new cash in exchange for banks’ financial assets. Yet prices did not increase substantially, nor would an economist expect an increase in the supply of money to increase prices when the economy is below capacity. U.S. inflation remains very low, around 1.6 percent. It would have been a lot simpler if Bernanke could have dropped in at Glindon’s workshop in north London, but it was closed by then. Indeed, many economists believe that the best approach for a government faced with a financial crisis is simply to create more money out of nothing and distribute it among the citizenry, essentially making all of us into forgers.
Wednesday was a busy day for Osborne, who not only delivered his annual budget statement to Parliament, announcing continued fiscal austerity along with hopeful predictions for the British economy. He also declared, in a statement from the Mint, that a new coin is necessary “to maintain the integrity of our currency.” Both the budget, and to a much lesser extent, the coin, seem to serve the same purpose: ensuring that money, legal and otherwise, isn’t overly abundant in the United Kingdom. Osborne and the Conservative government have been generally successful in pursuing this goal. Inflation, which had remained in the range of 3 percent to 5 percent for about four years during the recovery, fell to 1.9 percent in January.
U.K. fiscal and monetary policy have been operating at cross purposes, however. Like the Federal Reserve, the Bank of England has engaged in quantitative easing with the goal of increasing the availability of money — sensibly, as even in the more optimistic forecasts for the economy announced Wednesday, the United Kingdom does not reach capacity for another four years. Also, perhaps the Conservatives should restrain their enthusiasm for lower inflation rates. As Izabella Kaminska notes, rising prices are unpopular with voters, who might not realize that inflation can help them as well, for example, by helping households to pay off mortgages and making it easier to borrow for a new home.
To be clear, the new coin will only have a very small effect on the supply of British money, and only over many years as the old coins exit circulation. Yet if Osborne wants to insist that funds are short for Her Majesty’s government, he should be more careful not to waste resources on projects at the Mint that in the best case will do nothing to improve the national economy.
Click below to read about dodecagonal coins around the world.