Counterfeiting is a classic example of profit appropriation and cost nationalization. The counterfeiter makes no contribution to the process of wealth creation; he passes off worthless items as money, the production of which costs him far less than the effort he would have expended to earn them on the open market. Since the same money circulates among many people, the costs fall on all of them—provided they accept counterfeit money as genuine.
The state does exactly the same thing. It produces monetary units that were not earned (that is, no product was produced in exchange for them) and were not mined, like gold, silver, or bitcoins.
The state does this because it always seeks to expand its power. This expansion takes many forms, but most of them require money. Waging wars, funding “social programs”—all of this requires resources the state usually does not have. Taxes have their limits, and raising them finds little favor with the broad masses. Creating monetary units out of thin air is an elegant solution, known since ancient times.
It is precisely the possibilities of counterfeiting—from coin debasement in antiquity and the Middle Ages to the sophisticated operations of central banks today—that gave rise to the modern financial system. The legalization of fractional reserve banking, paper money, central banks—all of these are steps toward establishing a monetary monopoly. A monopoly, and especially a compulsory one, is the main goal here, since only such a monopoly allows for the full exploitation of counterfeiting. Imagine that no such monopoly exists and the government is merely one of several issuers of its own monetary unit, while the money of other producers circulates in parallel. In that situation, the market would quickly react to any unsupported issuance, and people would abandon the government’s currency. Only a monopoly requiring the inhabitants of a given territory to accept state money makes state counterfeiting maximally profitable.
Needless to say, the implementation of this policy varies—from bold Zimbabwe to the cautious (in the past) Bundesbank. However, all states “do it.” The costs of such financing, as with taxes, are borne by the subjects of the state. But generally, as long as it does not lead to hyperinflation, the general public remains unable to discern the causes and effects. Moreover, by labeling price increases as “inflation” rather than what they really are—an increase in the money supply—the state has channeled popular discontent against the “bourgeoisie,” “traders,” and other supposed “natural enemies.”