Segment from Bridge for Sale

Mo' Money, Mo' Problems

Stephen Mihm returns to talk about the size of America’s counterfeit economy, and how the problem was eventually solved. Read more here.

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BRIAN BALOGH: In just a moment here, we’re going to return to our interview with Stephen Mihm. But first, let’s establish what the legitimate economy would have looked like in the 1810s and ’20s.

ED AYERS: Now, as we mentioned, this was a time when private banks were popping up all over the place, each issuing its own money.

Now, the bank notes were basically IOUs. The idea being that if you ended up with one of them, you could take it to the bank and redeem it from gold or silver coins.

PETER ONUF: The problem was a lot of the new banks were totally unreliable. There was hardly any government regulation, so many simply churned out as much cash as they wanted. Even if they didn’t have reserves to back it up. Which meant that even real bank notes could turn out to be worthless.

STEPHEN MIHM: It was a saying among businessmen at this time, merchants, that they preferred a counterfeit note on a reputable bank than a genuine note on a fraudulent bank or a bad bank. And this cuts to the core of what money fundamentally is for us on a very deep, almost epistemological level. What is money?

Money is something that can pass and function as money. That’s almost like a circular argument. But money derives its value from its ability to move from one place to another and facilitate transfers.

And as long as it performs that function– well, no one is really out.

PETER ONUF: What you’re suggesting, which is very distressing to me, Steve, is that the distinction between good and bad is sometimes hard to establish.

STEPHEN MIHM: Right. The distinction between good and bad money, between genuine and counterfeit money, was very muddy, very amorphous, and very blurry. And the counterfeiters, of course again, rhetorically make hay of this when people attack them or even put them on trial.

They’re not beyond saying that what they were doing– printing money– was really no different than what the bankers were doing. But in fact, in some respects was more honest. Particularly when you put a counterfeiter side by side with a banker who claimed that he had money in the bank to redeem his notes. At least the counterfeiters acknowledged that there wasn’t anything backing their notes.

And at the same time, people who were on the other side of the equation who hated banks, not counterfeiters but just ordinary working men and women, looked at banks and said, look, what you’re doing is really, effectively counterfeiting. You’re setting up these corporations. You’re issuing money. You have no intention of redeeming it. And in fact, you seem to have no capacity to redeem it either. And so you’re really just a counterfeiter operating with legal sanction.

PETER ONUF: Steve, I want to press you hard on how you really feel about counterfeiters. After having done all this work and written this excellent book, I think you might be a little soft on them. Is that a fair charge?

STEPHEN MIHM: I think that counterfeiters are– it’s very easy to be sympathetic to them. Or at the very least, taken with their exploits.

The one thing though, that I think sometimes gets lost when people talk about counterfeit money, they claim that it’s a victimless crime. And that’s not true.

The counterfeit money moves in circulation through the economy. Eventually stops. It almost invariably stops not at a bank, but with someone who was the least knowledgeable person about money and was the one left holding the bag. And they’re the person who is most likely to go to jail.

And if you look at the actual convictions of people accused and tried for counterfeiting or passing counterfeit notes, it’s almost invariably the low-level poor people, many of them immigrants, who sometimes couldn’t read, who end up getting the shaft, getting left holding the bag.

PETER ONUF: Yeah, this is a good point. This is the classic case of caveat emptor– “buyer beware.” And a lot of people are not capable of that kind of vigilance to know what they’re buying.

STEPHEN MIHM: Absolutely. I think you’re hitting on something actually very important, which is that in today’s climate of free market fundamentalism, there is inevitably the claim that the market will sort things out.

But this period– and arguably more recently in American history, as in the last decade– I think shows that just as much as one person may be far more equipped to wade through a mortgage document several hundred pages long, people were more equipped to discern the differences between money at this time. And that was not their fault. Coming off the boat from Ireland should not be what ultimately lands you in jail.

PETER ONUF: So Steve, let me ask, how would you explain the end of this era, how is it that we now do trust our currency? And that we’re not worried constantly about the money supply?

STEPHEN MIHM: So the answer to that question comes with the Civil War. The Civil War is like the deus ex machina. It’s the thing that transforms so many things in American history.

PETER ONUF: Yeah, Ed Ayers would agree with that.

STEPHEN MIHM: And it transforms the money supply, too.

And on the eve of the Civil War, 1860, there are, by this point, 10,000 different kinds of money in circulation. Paper money, never mind all the different coins and the rest.

The Civil War comes, we all know that wars have to be financed as well as fought. And the North almost immediately runs into a crisis of financing. And while it ultimately pays a lot of the bills with bonds and taxes, it also pays the bills with a fiat currency known as the greenback. And this is a note that is worth what it’s worth because the government says it’s worth that. It’s legal tender.

These notes offer an opportunity of unimaginable proportions for counterfeiters who have been preying on small, state charter banks, but now have the opportunity to prey on the biggest bank of all, the federal government. And of course, they swing into action, the counterfeiters, and they begin counterfeiting them.

And this would be fine, except that they are now doing something more than preying on private corporations. They are preying upon the state, a state which is actually threatened in its own survival. It has to win this war.

And as a consequence, counterfeiting becomes deemed very quickly an immense threat. Because if the money supply, which is already viewed a little bit skeptically because it’s fiat currency, is counterfeited, it’s a disaster. And so the federal government gets anxious about this. And they basically get an appropriation to create something that becomes known very quickly as the United States Secret Service, which is not about protecting the president, obviously. And Lincoln would have benefited from protection.

PETER ONUF: You might say that.

STEPHEN MIHM: It’s very strange to think that from 1865 to 1900, the Secret Service did not protect presidents. But it did protect the currency. And it did so phenomenally well.

PETER ONUF: You’re now painting a picture of the solution to the counterfeiting is the emergence for the first time of an effective federal state where it matters most in the money supply. And you have a new infrastructure, to some extent, clandestine, covert, dedicated to this war against traitors against American sovereignty, the counterfeiters.

Now it’s no longer folk heroes, no longer kind of a shadow extension of the economy. Now the boundary between what’s legal and what’s not is bright and clear.

STEPHEN MIHM: That’s right. And the Secret Service, very quickly, is known as a rather fearsome organization. It is something that actually strikes terror into people because it is ruthless. It becomes known in one journalist’s phrasing as a “gigantic, invisible machine,” a kind of surveillance state dedicated to crushing these people who dared insult the majesty of this newly reinvigorated state.

PETER ONUF: That’s Stephen Mihm, an historian at the University of Georgia. He’s the author of A Nation of Counterfeiters: Capitalism, Con Men, and the Making of the United States.

BRIAN BALOGH: We’re going to take a short break. But don’t go away. When we get back, we’ll take a trip to New York City. hosts, get your cash out because I understand they have a terrific deal on a beautiful bridge.

ED AYERS: You’re listening to BackStory. We’ll be back in a minute.