Book Review: A Nation of Counterfeiters

In this money saturated world in which we swim, it is hard to imagine life without a small cadre of trustworthy, dominating international trading currencies, national banks, central banks, Federal Reserves and all the rest. Yet, it was not always thus. The history of paper money contains its struggle for emergence into viability.

If money is an agreement, how did this agreement emerge? What sorts of journeys and precedent agreements were engaged? Better yet, what sorts of people, circumstances and stories played a part? What were the circumstances, contexts and implications.

For pure romance, complete with bad guys (and girls), shoot ‘em ups, rogue law enforcers and the spine tingling adventures of a new country on the move and its many needs for simple fiscal liquidity, it is hard to beat A Nation of Counterfeiters by Stephen Mihm (Harvard University Press, 2007). It shares some of the best American money stories from that time between American Revolution and Civil War when the West was wild--but so was much of the East.

A Nation of Counterfeiters tells the story of America’s early days, when hundreds of “locally grown” currencies were the medium of financial exchange. It’s a scintillating series of stories of the early life of American money.

Those were rowdy times. Paper money was not government-issue or from any single monopolistic source. And for the most part, there were no national banks. Two attempts to create a national bank ended in premature dissolution. Alexander Hamilton promoted the First National Bank following the Revolutionary War, but it died in 1811 of an expired charter. Two decades later, Nicholas Biddle, president of the Second National Bank, took on President Andrew Jackson—and lost. In the process, his bank lost its charter. What followed remained controversial and unstable with repercussions that led straight to the Civil War, national institutions and, ultimately a national currency. There were numerous curves and hazards along the way.

In the absence of large national institutions serving as ultimate money sources and value referents of last resort, “money” as we might know it, was mostly generated by literally hundreds of regional banks. Supposedly based on the specie held in their vaults, these banks issued elegantly printed notes promising redemption upon presentation. We can only imagine the chaos that ensued as hundreds of different issues floated unchecked in the market place.

Today we are relearning lessons. Unless money can be ultimately and reliably exchanged for something meaningful like gold or real estate -- it fails its function as “a storehouse of value.” In those times, a bank president would attest, in writing directly on the bill, that each piece of paper issued by his establishment was backed by the gold or silver specie in its vaults. Sometimes they lied. Sometimes the counterfeiters made exquisite replicas. Either way, the country was plagued by currency counterfeiters. A piece of paper claiming to be money was like a lottery ticket: if you were lucky, it was good legal tender. Unfortunately for recipients, the bills frequently proved to be “questionably legal” or just-plain-illegal tender.

Distinguishing the good from the questionable or clearly bad was tricky. In the absence of today’s technology, it was difficult to distinguish the touch and feel of true money from counterfeit. The people were left with unreliable tools for determining basic legitimacy, much less whether a bank’s money was backed with real value.

In consequence, financial transactions of all sorts were fraught with the peril of accepting worthless currency. It was like playing a huge game of “hot potato” or musical chairs. If you were holding the bogus bill when the music stopped and its issuing deficiencies were discovered, you accepted the burn.

Today, major currencies seem almost impossible to replicate. They come complete with embedded, easily detected security devices and an array of tools for quickly spotting fakes. Accordingly, it’s difficult for us to grasp the fiscal pandemonium of literally hundreds of different sorts of bills from hundreds of different institutions, each with its own special engraving, signatures, wear and tear and capacities for distortion. Not surprisingly, there were numbers of people who thought it easier to make money than to earn money. Sometimes they were the same folks who did the work for the banks.

Consider Mihm’s great cocktail-hour stories of the denizens of “Cogniac Street” – slang for the counterfeiter culture that thrived along the U.S./Canadian border north of Vermont. Potential Hollywood scripts abound including some cross-border raids of dubious legality. In the process, we learn the fine art of passing bogus bills and the state of retail store security circa 19th century. Store owners were forced to rely on handbooks that contained replicas of good money and bad.

To the South were the sub textual battles between Jacksonian populists and the Biddle nationalists. Meanwhile, the actual counterfeiters claimed to be doing the public a service by adding to liquidity. Questionable banks claimed the same, especially when their reserves were more air than specie.

Meanwhile, the commerce of a new nation ultimately required something more reliable. With the advent of the Civil War, we watched a national currency begin to emerge as “greenbacks” -- together with a Secret Service that got serious about counterfeiting as state banks lost their charters for generating new bills. With the national currency came more certainty. Though counterfeiters were not eliminated, their activities were severely curtailed.

Of course, their mentality remains. From today’s sub-prime loans, to ‘80’s-‘90’s savings and loan scandals, to penny stocks, the ‘80’s tax shelters, ongoing securities fraud, spurious accounting, abused laws and miscellaneous Ponzi schemes, there is always someone working overtime to get something for nothing. A Nation of Counterfeiters tells us about one such group in the context of a unique time and place. In the process, by addressing the difficulties inherent to the creation of symbolic currencies, this book helps us understand what makes money “money.”

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