An interesting question arises here: what exactly, and at what point, can be considered “fake” and what “real” money from an economic perspective? In the case of gold and receipts for it, at least we can distinguish one from the other. The difference between the weight of gold for which receipts were issued and the weight of gold actually held in stock will tell us the amount of fake money. In the case of non-convertible paper money, everything becomes considerably more complicated.
To better understand this, let us imagine a world in which all goods are equally easily exchanged for one another. One might say that in this world every good is money — that is, for each of them there exists a price grid reflecting exchange ratios in units of that good. In our world, goods are exchanged for one another with varying degrees of difficulty, which is why one or two goods serve as the monetary standard for a given economy at a given time. But this does not change the essential nature of what is happening: the monetary good is part of the economy, its production has its own costs, and those who engage in it do so because it is more profitable than other existing alternatives. The key words here are “other alternatives.”
That is, for a given economy, “real” money is money that exists and is produced (in the case of commodity money) within that system. Any monetary units that do not meet these requirements are “fake.”
An interesting era for our topic is the period when gold and silver from the New World flooded into the Old. From the standpoint of economics, this money was “fake,” even though the gold and silver themselves were quite real. The “fakeness” lay in the fact that they were simply stolen — that is, their appearance in the economy was not connected with the properties of the system itself, but with the profitability of gold mining, and other factors. And the consequences were the same as in the case of issuing unsecured paper money — inflation (small, just 5%, but apparently shocking at the time) and the appearance of “bubbles” like tulip mania in Holland.
And, of course, the fact that the production of the monetary good is “embedded” in the economic system does not guarantee against inflationary effects. Let us recall that the discovery and development of significant gold deposits in Australia and the United States also led to short-term inflation. The “embeddedness” of money production in the economy guarantees only that such phenomena cannot be long-term, since in that case the monetary functions will pass to another good.
And the last point, somewhat paradoxical, that well illustrates the problems associated with understanding the abstract nature of money: can “fake” money turn into “real”? Indeed. After emission stops, new money (which at that time acts as “fake,” that is, destructively) after some time will be adapted by the system and become “real.” This is easy to understand if one remembers the price grid and that it reflects price changes caused by supply and demand. As soon as the impact of new money on this process ceases (that is, supply and demand are determined by changes in real factors, not changes in the money supply), it can be considered “real.”
Inflation constitutes a major problem for three reasons: a) the process of adaptation to fake money each time throws the economy back, since it introduces errors in resource allocation; b) the state never conducts “one-time” inflation — inflation is carried out constantly by the banking system with fractional reserves; c) the state is unable to abandon the inflationary policy.