Effects of Fake Currency on the Economy

Counterfeit money refers to fake or imitation currency that is produced with an aim to deceive. The act of producing counterfeit money amounts to forgery or fraud, as it is done without any kind of legal sanction. The monetary history of the world is so heavily flooded with the accounts of counterfeit currency invading the markets from time to time, that the production of fake money seems as old as money itself. Even before paper money was introduced to the world, there were several instances of fakes with respect to metal currency. And, such instances were not limited to a certain region, but were prevalent all over the world. When metal money or coins were in circulation, counterfeiting was done by mixing base metals – copper, aluminum, lead, zinc, tin, and iron – with gold and silver, two metals that were predominantly used to make ancient coinages.

The practice of counterfeiting became more refined with the arrival of paper currency. One of the classic instances of monetary forgery comes from the World War II era, when the Nazis counterfeited American dollars and British pounds in huge quantities with the aim to destabilize the economies of both these countries. An enormous amount of counterfeit money is in circulation throughout the world even today, and some of it is of a really high quality, to make its identification all the more difficult, if not impossible.

Currency counterfeiting is a crime that continuously poses a threat to a
country’s economy and is a source of financial loss to its citizens. Some of the ill-effects that counterfeit money has on society are a reduction in the value of real money; and increase in prices (inflation) due to more money getting circulated in the economy – an unauthorised artificial increase in the money supply; a decrease in the acceptability of paper money; and losses, when traders are not reimbursed for counterfeit money detected by banks, even if it is confiscated.

At the same time, in countries where paper money is a small fraction of the total money in circulation, the macroeconomic effects of counterfeiting of currency may not be significant. The microeconomic effects, such as confidence in currency, however, may be large.

Failure to take significant action in combating counterfeiting can lead to uninsurable risk, which has a harmful effect on the reputation and functioning of a country’s central bank.