Counterfeit Money and The Problems That Go With It...

As counterfeit money goes into circulation, if there was enough of it, the public would deposit their excess non-interest earning cash into the bank. Since a bank doesn’t earn interest on cash they would deposit it into the Federal Bank to buy interest earning funds such as T-bills.

As the banking system reserves increase this causes an imbalance on the supply and demand which leads to a downward pressure on the Federal rate. As a result, the government would then sell their Treasury securities to the public which increases the interest payments the Treasury has to pay to the public.

However, this doesn’t mean the government is effected by counterfeit currency and the problems that go with it . The government doesn’t make a profit off their own currency, because they are the source of the currency. What does happen is counterfeit bills increases the amount of money in circulation which then decreases the value of the currency. Therefore, it is the people who are effected the most by the circulation of counterfeit currency.

In addition, as the interest payments the Treasury owes to the public increases because of the counterfeit money the government would have to cover it by increasing the taxes. This increase in taxes would lead to a redistribution of finances in the private sector. So the public portion of the taxes would be effected the most by counterfeit currency.

This is why many of the counterfeit currency today is paper and not coin, it is virtually impossible to create a counterfeit coin today.