A Criminal History of the U.S. Dollar: A Q&A on A Nation of Counterfeiters
The dollar has taken serious hits recently, not only continuing to fall against the euro but being caught even by the Canadian loonie. From the long view, however, the dollar’s current woes are simply another step in the long and tumultuous history of paper currency in the U.S.
Stephen Mihm, a professor of history at the University of Georgia and author of the new book A Nation of Counterfeiters: Capitalists, Con Men, and the Making of the United States, has researched the rise and development of national currency leading up to the Civil War, as well as the counterfeiters who profited from the lax policing and confusion that accompanied the transition to government-issued money. He kindly agreed to answer our questions.
Q: How does the U.S. compare with other nations in its quest to create a common paper currency?
A: Many countries at comparable stages of economic development embraced uniform, exclusive paper currencies earlier than the U.S. Some countries, like Norway and Denmark, completed the process by the 1820s; others, like Britain and France, made decisive moves towards a paper currency in the 1840s.
The U.S., by contrast, resisted moves in this direction until the 1860s. Prior to that time, hundreds and eventually thousands of private banks, each chartered by the individual states, printed their own money; over 10,000 different kinds of notes floated in circulation by 1860, in a bewildering variety of denominations and designs. Everything from three-dollar, four-dollar, and seven-dollar bills were in circulation, and notes depicted everything (and everyone) from Greek gods to Santa Claus to obscure politicos.
By contrast, the federal government didn’t print paper money, and didn’t even contribute many coins to the “hard money” supply (most of the coins in circulation came from the mints of foreign governments, especially those of the former Spanish colonies). If you could go back in time and look in the cash register of a corner store, for example, you would find a motley assortment of bills and coins. Little wonder that by the 1830s, storekeepers were subscribing to things called “counterfeit detectors” and “bank note reporters” — thick pamphlets that gave descriptions of all the different notes in circulation, along with their presumed valuation and known counterfeits. People exchanging money would turn to these booklets whenever a bill changed hands, poring over it to identify what, exactly, they were accepting as money.
Q: Prior to the general acceptance of paper money, coins made up the majority of hard currency in the colonies and in Britain. Why the switch to paper? Did this change make counterfeiters’ jobs significantly easier?
A: In the colonial era, Americans had a problem: though the country was home to budding capitalists, it had very little in the way of capital, which in that era meant one thing — gold and silver coin. Thanks to trade imbalances, most coins in the colonies ended up flowing back to Britain. This loss left entrepreneurs struggling, as it did the colonial governments, which had their own bills to pay.
The solution? Have the individual colonial governments issue paper notes that claimed to be “equal in money,” meaning equal to coin. Never mind that there weren’t enough coins in the colonial coffers to back up these bills. Beginning with Massachusetts in 1690, the colonists pioneered the first government-issued paper money to appear in the Western world.
The result was a boon to capitalists in need of a means of exchange, but it also marked the beginning of a home-grown counterfeiting industry. Though many of these early bills were marked “‘Tis Death to Counterfeit,” 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. Convictions were rare, and harsh punishments even rarer.
Q: What were other factors before the Civil War that allowed counterfeiting to flourish in the U.S.?
A: Counterfeiting continued to be tolerated to a remarkable degree after the founding of the country. Part of the issue was the fact that 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.
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. Needless to say, this made prosecuting counterfeiters a difficult affair.
It also didn’t help that policing was a corrupt, understaffed, and sorry affair during this time. Counterfeiters corresponded with one another across state and even national lines; the cops, by contrast, hardly knew what was going on in their own backyard, much less in a neighboring city or state. Extradition was almost nonexistent, so when a counterfeiter was arrested, he or she simply posted bail and fled to a more hospitable locale — and began doing business once again.
Q: Did the explosion of counterfeiting in the late 1800s hinder economic growth? Why or why not?
A: Not at all. If anything, 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.
That said, it’s worth noting that counterfeiters were just the beginning: there were plenty of other dubious entities at this time, all printing money that wasn’t, strictly speaking, counterfeit. A favorite tactic of counterfeiters, for example, was to create a note on a bank that didn’t exist, but sounded plausible: the Metropolitan Bank of New York, for example. Sounds good, right? But it didn’t exist. Still, they would print off notes and put them into circulation as if the bank was legitimate.
Q: How did the Civil War affect the national currency? Did the war have any affect on the practice of counterfeiting? What about the public perception of it?
A: Everyone knows that the Civil War destroyed slavery. Less well known is the fact that it abolished the system of private currency creation that had served the country since its founding.
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 bank notes out of existence.
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.
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.
Would-be counterfeiters also faced a new, national police force that had emerged during the Civil War: the Secret Service. Long before it was charged with protecting the president, the Secret Service was created to protect the new national currencies. Founded by a corrupt but cunning former bodyguard, prison warden, and shadowy figure named William Wood, the Secret Service grew into a well-respected, professional police force within a decade of its founding. And it proved remarkably successful: by the end of the century, counterfeiting ceased to be prevalent in the U.S.
Q: Tell us about some of the unintended consequences of striving for a single national currency.
A: 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.
Q: How and why did New York become the center of capitalism?
A: Until the 1830s, it was Chestnut Street, Philadelphia, that was the nation’s financial center, not Wall Street. Everything changed during that decade: New York City, which was already booming thanks to the opening of the Erie Canal, was the chief beneficiary of a bizarre but nonetheless cataclysmic political struggle called the Bank War.
Though the federal government didn’t issue paper currency at this time, it had chartered something called the Bank of the United States, which was a forerunner of modern central banks. Based in Philadelphia, it issued bank notes; it also regulated all of those smaller state-chartered banks, making sure that they didn’t extent too much credit.
In the 1830s, then-President Andrew Jackson decided to destroy the bank, vetoing attempts to recharter it for another twenty years. Why he and his political followers did so is something that historians still argue about. Some of his supporters, though, were New York bankers who had lots to gain if the field was cleared of the Bank of the United States. They lent crucial support to the veto, and when Jackson triumphed, the nation’s financial center moved north to Wall Street.
Q: Tell us about the state of counterfeiting today. How has it evolved? Are counterfeiters neck-and-neck with new technology? Or have technological advances essentially made it a pointless crime, since perpetrators are sure to be caught?
A: Counterfeiting fell into near-insignificance until the 1990s, when a new crop of digital technologies — color photocopiers and programs like Photoshop — suddenly made the greenback an easy mark for homegrown forgers. The Treasury responded by launching a series of new bills which are filled with anti-counterfeiting devices.
These new bills have had the effect of frustrating most counterfeiters, save for more sophisticated rings. The most infamous of these — if the evidence is to be believed — is the government of North Korea, which until recently was alleged to have been producing high-quality imitations of fifty and hundred dollar bills. These “supernotes” are partly responsible for the recent redesign of the higher-denomination bills. Still, most counterfeiters are trailing far behind these technological improvements. While it’s still a crime worth pursuing in the event a criminal gang can muster the necessary resources, it’s much more difficult than it was a century and a half ago.
Nonetheless, the spirit of counterfeiting lives on in other forms. People who once might have pursued counterfeiting now can make their living by identify theft, credit card fraud, or any number of the online con games that grow ever more sophisticated every year. We may not be a nation of counterfeiters any longer, but the spirit of those earlier criminal entrepreneurs is alive and well.