Glastonbury festival is a truly wonderful thing and you should go if you have the chance. I showcases the very best of humanity on every level. If you like making an effort to have fun, and have other people have fun, it is the place for you! This year however, one particularly odd incident occurred. I noticed several of the food stalls with signs saying that fake £20 notes were circulating, and that if one they found one, they would confiscate it there and then. I didn’t think much of it as I was meandering across the site to see “First Aid Kit” – who you should go and listen to right now for the remainder of the time it takes you to read this post! Later on, a friend told me that having handed what he thought was a perfectly good £20 to one of these stalls, they told him they had to take if from him. I was shocked! It is of course totally against the law to do this without providing a customer with a a receipt, and subsequently having the police examine the note before destroying it if it does prove to be fake. You cannot simply take money from people on the basis that you say it’s fake. As an aside, if you know anyone to whom this happened who might have a photo, or a name of a vendor that was participating in the scam, please let me know. I am discussing this with the festival organisers. Later on, the same thing happened to me, but as you can imagine, they had picked the wrong guy. I told them that they had two choices. Either destroy the note in front of my eyes by burning it or tearing it into little pieces, or I would call the police. They gave me back the note. The BoE carries a good page on what one should do in this situation:
Now, Forgery is clearly a problem for a monetary system. But why? Most people would say something like “it is stealing from the government” or “it will reduce trust in the system” but actually this isn’t quite right. In fact, the only dis-benefit of a good forgery is that the original forger and his friends will, arbitrarily, be able to command a bit more of societies resources. In extremis I suppose one could argue that it could cause inflation, but given that materially less than half of all tansactions are carried out in cash, and these tend to be of lower value, and cash constitutes only £73bio of our £2.3trio money supply (3%), it would have to be very extreme indeed! Now, obviously it is important that cash be made hard to forge, otherwise forgery could become ubiquitous enough that the above problems poses serious challenges. But having made cash uniquely hard to produce, and having robust laws to punish forgers, there really is no issue with a few well forged notes circulating. Quite apart from the moral issue of jacking festival goers, who speaking from personal experience may not have 100% of their mental faculties to call on in that situation, it’s very clearly economically illiterate to worry about.
It also jars with the normal process of money creation in a modern economy. It’s now widely accepted that the Bank of England does not control the quantity of money. This is left to commercial banks, who create new deposit money when they extend loans. This is something that whilst widely accepted by those who take an interest in such things, is totally against everyday intuition and still rather baffles professionals in the financial industry who don’t spend a lot of time thinking about the nuts and bolts of retail banking. I absolutely blame economics teaching for this – and applaud organisations like Positive Money who are seeking to promote mass public understanding of this key aspect of the financial system.
Then, beyond that, we have the ever more crazed efforts by central banks to change the composition and size of the money supply using QE, special lending facilities, FX swap lines and all sorts of other gimmicks. Ultimately, all these are doing is using discretionary powers of central banks to “trade” their way to better economic outcomes. There is some evidence that it has helped, and some that it has made other problems worse. My personal belief is that by inflating financial asset prices in pursuit of consumer price stability and arbitrarily redistributing wealth, they are storing up huge problems. But this post is not for discussing that. It’s merely to point out that my friend handed over his £20 note because a pie shop at a festival told him it was fake. He was worried about the fake notes, but not about being robbed. The gulf between people’s ideas about money and reality is so vast that modern Central Bankers cannot possibly be said to have a mandate for what they are doing. The public needs to be told about what’s going on so they can hold them to account.