How does Counterfeit Money Affect the Economy

Did you know...

... that Superdollar is the name given to a $100 bill of the United States that is actually, a counterfeit. It is of such high quality that it is very difficult to distinguish it from a real $100 note.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. Enormous amounts 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.

Counterfeit Money and the Economy
The presence and use of counterfeit money in the market(s) can affect the national and global economy in a considerable manner. For one, it deceives people and they tend to lose confidence in their money and their nation's economy - the worst thing that can happen to any country. Circulation of counterfeit currency can have the following adverse effects on the economy:

Devaluation of Currency and Inflation
As counterfeit money makes its way into the markets, suddenly there is more money in circulation than there should be. Owing to this, the purchasing power of people increases and there is a rise in the demand for goods and services. Then, since supply cannot meet the demand, shortage of goods occurs, which in turn, leads to the rise in prices, i.e., inflation. Now, people have to pay more money for purchasing the same amount of goods. This is called 'currency devaluation'.

Black Marketing
The shortage of supply that is created in the market due to extensive circulation of forged currency, gives rise to another grave problem, that of black marketing. Goods and services, which should be made available to people at established and reasonable rates, are sold, illegally, at elevated prices. Owing to this, only the select few can afford to buy commodities, which means that the poorer strata is left to starve. It is called 'black market' because all the transactions are essentially made in cash and are always off the record. Sometimes, commodity shortages are purposefully created so that more amount of cash can be exchanged and still go unaccounted. All this, in turn gives rise to the vicious circle of corruption.

Dumping of Goods at Cheaper Rates
Inflation, debasement of currency, and black marketing prevalent in a particular country can all collectively benefit some other country, which may then dump inferior quality goods in the market, obviously at cheaper rates. Because these goods are much cheaper than those which are produced within the country, they naturally capture a sizable market as more and more people opt for them owing to their affordability. This, further weakens the country's economy.

Non-reimbursement by Banks
This is one of the elementary issues that is associated with the circulation of counterfeit currency in the economy. Especially, big businesses and industries of a nation are likely to incur huge amounts of losses. When the banks are informed about fake currency being involved in some significant business transactions, it is confiscated with immediate effect, but most of the time, the businesses do not get reimbursement for their money. This leads to heavy losses that may affect them, either immediately or in the long run.

Loss of Public Confidence
This is the greatest consequence of circulation of counterfeit money. People tend to lose faith in the economy of their country and the money that they hold. So, in order to avoid any kind of encounter with counterfeit money, they may start making demands of their payments to be made in some other, more stable currency. This may further destabilize the country's overall economy.

Counterfeit money also impacts the global economy to a large extent. There are instances wherein nations try to destabilize the economies of their political and economic rivals by counterfeiting their currency in enormous amounts, and transporting it into their market. This not only weakens them economically, but also socially and politically.

Today, there are several counterfeiters of currency, functioning from every nook and corner of the world, waiting to circulate their false notes in the world. Governments and security agencies have been taking measures to put a heed to this illegal, criminal racket, and to catch and punish the wrongdoers. However, none of them seem to be adequate as the number of counterfeiters goes on rising with each passing day. Worst affected by the circulation of counterfeit money are the common people, who can neither recognize these false notes, nor afford losing their hard-earned 'money' to confiscation.