Beginning with Massachusetts in 1690, the colonists pioneered the first government-issued paper money to appear in the Western world.
All the colonists agreed that it would be a good idea that their government issue paper money? Or was it the government which decided (maybe with some popular support) that it would issue paper money?
Convicted counterfeiters generally avoided the gallows, for the simple reason that the demand for money — real or counterfeit — outstripped the supply, and many juries saw counterfeiters as performing a public service.
Demand for real money not different from demand for counterfeit money? How strange that a government is not able to produce enough real money to satisfy the demand. Counterfeiters providing a public service by falsifying debt documents in order to gain wealth at the expense of others naive enough to accept their notes? It looks like popular juries are not always a good idea.
Most of the paper money in circulation came from private banks, not public governments. Counterfeiting was thus a crime aimed at a corporation, not the state. That meant that punishment was even less of a deterrent: a few years in prison, tops. Given that many of the banks issuing paper money were viewed as “legal counterfeiters” by people critical of unsavory banking practices (subprime lending is just the latest chapter in this country’s reliance on shaky credit), juries weren’t too willing to send someone to prison for imitating the notes of a bank whose own right to issue notes was far from accepted.
The state is supposed to defend private citizens from aggressions or breaches of contract, but it does not show much enthusiasm or ability at this task; what it really does is defend itself, and it did not have the monopoly on money issue yet.
If you do not accept the right of a bank to issue notes, just do not accept them yourself and do not try to pass them on to others if you happen to possess them. Also notes from low quality banks would tend to be less trusted, so counterfeiters would not seem to be very intelligent if they forged those notes instead of the ones from trusted banks.
All of this together meant a corruption of commercial ethics. Businessmen had a saying before the Civil War, which more or less went as follows: “Better a good counterfeit on a solid bank than a genuine note on a shaky bank.” What was genuine and what was counterfeit mattered less at this time than whether or not a note could be palmed off on someone else.
This really is corruption: it is better to try to cheat on others than to assume your risks or losses yourself. One of the biggest problems with money is the lack of distributed control of the institution, when individuals do not accept their own responsibility in controlling the quality of the circulating medium of exchange and just hope that others will be as careless as they have been; when the problem gets big enough they might demand that government intervenes in order to regulate money, and the ability to adapt and compete of the free system will disappear.
Counterfeiting contributed to economic growth, pumping much-needed (or much-wanted) credit into the economy, and helping to fuel the era’s breakneck economic growth. Such was especially the case in newly-settled regions of the country, where the demand for a medium of exchange was so great that people handling money were willing to overlook the fact that much of the paper in circulation was bogus.
Fake credit is not the same as real credit (are people still surprised about the current financial crisis?). Growth with fake credit is unsustainable. It might happen that people used fake documents as internal money in a closed area if local banking institutions were absent, but they would have trouble using that counterfeited money for trade with other areas where it would not be accepted. It would also be a highly unstable system, depending on trust that could suddenly vanish and prone to abuses.
When the South seceded from the Union, the North faced a serious funding crisis. Eventually, Lincoln’s administration reached for one of the only options available to them: the printing press. They issued paper money backed by the federal government (though the notes weren’t redeemable in “real money” for several years). These notes were the greenbacks, and for the first time, the nation had a uniform common currency. In time, economic nationalists passed legislation taxing the old system of private banknotes out of existence.
Government money is not a result of the spontaneous working of the free market. In this case it took a war to start the issue and a tax to destroy the private competition.
But the raft of legislation passed during the war gave the old banks an option: they could trade in their state charters for new, federal charters so long as they bought some treasury bonds (thus helping to pay for the war). In exchange, they got the right to issue notes.
The state gets a privilege to issue notes and quickly uses it to finance itself with the help of banks that depend on it. Soon the supply of money could not grow enough because there was not enough government debt to back it up.
These weren’t like the old notes, where banks got to choose the designs. Now, the federal government dictated the design; the only thing that differed in a given denomination of these new “national bank notes” was the name of the bank; everything else was standardized and chosen by the Treasury Department. All this new money was national in appearance: national heroes like the founding fathers were now in vogue.
This surge of nationalism meant a change in the climate of counterfeiting. What had formerly been a crime against often disreputable financiers was now a crime against the federal government. Anyone foolish enough to knock off imitations of the new currency now faced long jail terms and heavy fines.
Money is used as state tool to promote nationalism. Money is not the universal means of exchange any more: now it is enclosed within national boundaries. Financiers could be disreputable and prosecuted; government officials, even though they might occasionally be reputable, are the ones in command of the police, the courts and the jails, and they are not happy if someone interferes with their financial misdeeds.
Once the country began moving down the path of a common national currency, people started looking at money differently. Money became a means of cementing people’s allegiance to the United States: by handling it, you were tacitly putting faith in the fiscal rectitude of the nation.
At the same time, there’s a kind of blind trust that affects how we handle the currency in our wallets nowadays. Our money is so safe (for the most part) that we don’t even inspect it, save for the rare occasion when we get a high-denomination bill. Unlike people before the Civil War, who often spent several minutes inspecting every bill they received, we don’t look at our money. In fact, I suspect that many Americans can’t even remember the bills on which, say, Hamilton, Lincoln, Jackson, Grant, or Franklin appear, much less what shows up on the back of those bills. We trust our money so much now that we’re practically blind to it.
The land of the free becomes the land of the dependent on government, who trust it and believe that it can have fiscal rectitude. Blind trust in any institution destroys it, and that is the basic reason for our current problems with money and finance. Institutions only work if all persons using them contribute to their control.