“The only difference between a bank director and a counterfeiter is that the counterfeiter has given evidence of superior skill and modesty. It requires more talent to sign another man’s name than one’s own and the counterfeiter at least does his work in the dark, while the suspenders of [gold and silver] payments are brazen in the face of day, and laugh at the victims and dupes, who have put faith in their promises.”
President John Quincy Adams, from A Nation of Counterfeiters: Capitalists, Con Men And the Making of the United States
The Wild West of Money
The early United States had no national banking system. Instead, there were state-chartered banks, local banks and company scrip. Gold and silver coin was the only universally accepted payment.
In a town where no one knew you, trying to spend paper money was a good way to get run out of town with pitchforks. In this environment, confidence payments (initial transactions in gold or silver) were used to establish trust between new associates. This is where the term confidence man (con man) originates. There were plenty who’d take your confidence and run off with it.
It was hard for anyone to trust any but the most local of depositors, since bills were authenticated and exchanged at the issuing bank. Institutions could stretch their influence to increase their customer base, but this would also make them a more tempting target. A good counterfeit on a large, successful bank was often worth more than a genuine note on a small one.
Banks quickly learned to never make a public spectacle of going after outlaws. Telling the public the truth would ruin the reputation of their money, leading to bank runs and their own demise. Eventually, they realized they could join the counterfeiters and print more notes than they could redeem. The public’s confidence in money was far more important than physical backing, while it lasted.
So bankers and counterfeiters conspired against the public, playing two sides of the same game. It was commonly said that the only difference between a banker and a counterfeiter was which side of the law they were on.
Working The Frontier and Border
With the money supply so decentralized, Federal taxes were all but impossible to collect. Without Federal law enforcement, chasing down violators was left to the states, or the banks themselves.
Counterfeiting became a national (and international) pastime for some. The most profitable operations sat along the U.S./Canadian border, targeting the major cities: Montreal, New York, and Boston. Runners were sent to obtain the latest notes, pass counterfeits, and return with the spoils. Those running the racket could easily evade the authorities by jumping the border. Steven Burroughs, an infamous veteran of this black market, would post bail or bribe the authorities in counterfeit notes. His pursuers were often so poorly paid that they welcomed the opportunity to take a bribe. Having plied his trade on one side of the law, Burroughs later switched sides to become a legal banker.
Frontier towns saw counterfeiting as a public service. Lack of local banking limited the money supply, so the influx of bad notes was a welcome addition to the local economy. The authenticity didn’t matter, as the average citizen and trader couldn’t tell the difference.
The Second Bank of the United States
Before the “Hydra Of Corruption” was dismantled by Andrew Jackson, the nation’s second central bank partook in the same game. In the 1830’s, with the gold reserves running low, they began issuing branch notes from subordinate banks, and asserting them as legal tender. When presented for payment, the bank would denounce them as illegitimate. This defied even the bank’s own charter which required centrally issued notes, President Nicholas Biddle’s signature on each one, and redemption in coin upon request. Interestingly enough, an 1831 Ohio Case found an accused counterfeiter of branch notes not guilty for precisely that reason. The notes continued to circulate, and the public was none the wiser.
Under this system, the United States saw its first Federal tax collection. Centralizing the money supply under one bank allowed for easy taxation. By collecting taxes on the Federal Notes when they were cashed out into gold and silver, citizens were encouraged to keep their money in the system. The inflation from branch notes became a 100% tax on their face value, as these could never be redeemed.
After the bank died, control of the system returned to the hands of the local and state-chartered banks. The monetary values often fluctuated wildly, as the reputations of the issuers waxed and waned. Rumors of insolvency would cause rapid drops in value, only to be proven false after the rumormongers bought them up at discount prices.
In such a free-for-all system, the value and reliability of currency was often determined, in practice, by the appearance and reputation of the spender. This gave rise to an entire social class of local entertainers, who made a living by working their way into respected social circles. Prostitutes particularly excelled in this role. Since their clientele often paid in counterfeit bills, their only way of obtaining legitimate money was to use their entertaining skills. In the presence of fine guests at a dinner party, the hosting venue would be forced to accept these as payment, to avoid creating a scene.
Printing and Engraving – Origins of Manufacturing
With so many financial institutions producing their own notes, it made sense for printers and engravers to make reusable parts for the presses. Each note had primary plates, with removable die pieces to change the denominations, bank name, state of issue, or artwork. These minimized redesign work, but also afforded counterfeiters a new array of tools to work with.
With a full set of plates and dies, notes could be reproduced or even changed (to a higher denomination, for example). The same techniques pioneered here would later form the foundation of all mass manufacturing, following the Civil War. These techniques live on in the open-source software of digital currencies.
Currency – The Other Civil War
During the American Civil War, a covert Currency War took place behind the military engagements. The real story has been all but written out of mainstream history books.
Like most industries, Printing and Engraving resided mainly in the North at the beginning of the war. Ironically, northern bureaus printed the first several rounds of Confederate paper money. After the onset of hostilities, many of these craftsmen were hired south.
In late 1862, organized operations in the North began to counterfeit southern graybacks to be spent in the south. Tactically, this achieved profit for the printers and pushers, and confiscation of southern goods. Strategically, this slowly ruined the southern economy.
Since the currency’s value was also explicitly contingent on a southern victory, its credence soared after early battles such as (First) Manassas, Fredericksburg, and Chancellorsville. After Gettysburg, it never recovered.
By late 1864, even the Confederate Army was using Greenback Dollars. The South was defeated economically, long before its military defeat.
Early on, the damage was done by small, private parties seeking to exploit the chaos of war for their own personal ends. Edwin Stanton, Secretary of War, would later put together large-scale coordinated counterfeiting operations. Many of Stanton’s inner circle, due to their clandestine wartime work and expertise in currency warfare, would later become the first members of the United States Secret Service.
Stanton himself had a lengthy history of carrying out rogue activities, and had many suspicious associations. Some historians have profiled him as a borderline psychopath. He definitely merits further discussion, but I’ll delve into his history another time.
Decentralized Currency, In the Digital Age
So, what does all of this mean for Bitcoin, Litecoin and other Virtual Currencies?
•Confidence Payments are extremely important. Dollars have already served as confidence payments for the emerging digital economy. Trade must be established in existing goods and services before new forms can be accepted. In its nascent phase, every new currency will have to be funded in old ones.
•Social Capital is important to establish business relationships and promote acceptance, especially at the local level.
•Digital Currencies and their institutions must retain good reputations to retain their value.
•Currencies will compete, forming economic boundaries. In the past, these were always geographic and political. Now, it is less certain what they will be. The boundaries may become: industries, cultures, products, or business methods. Some currencies may become very specialized, and some may remain very general in use.
•International movement of funds will break free of existing channels. The international financial gateways regulated by the Bank of International Settlements and IMF are already obsolete. The implications of this are colossal.
•Even in the 18th Century, bans were difficult to enforce, and borders could be jumped. It will be unfathomably more difficut for modern governments to control the movement of digital currencies. The finance world and law enforcement will eventually catch up to this reality.
The Digital Tax Man Cometh?
Listen To Bitcoin – You know what this is? This is the sound of people not paying taxes.
•Digital Currency will eventually render the current Tax Collection methods of modern governments obsolete. As they spread, it will slowly become infeasible to collect taxes by salary deduction, money printing, or interest rate manipulation.
•With 1% of the U.S. economy decentralized, the ratio of digital consumers to IRS tax officers would be over 300:1. Each percent it increases will multiply by that same ratio. It’s difficult for one person to make 300 people do much of anything on the internet, much less forcibly turn over their money.
•In a decentralized economy, there are a limited Tax Collection Methods:
Point-of-sale: We’re all familiar with sales tax. This makes for easy collection when everyone uses one, easily-traceable currency. In an economy with competing currencies, this would quickly become infeasible. It would likely need to shift to point-of-sale on specific goods that everyone needs, such as food or fuel. Some modern nations primarily collect sales taxes. This avoids the expense, inefficiency, and political dissatisfaction of running an Internal Revenue Service.
Direct Collection: Tax Collectors show up at your doorstep and demand payment. This is unlikely as it’s very inefficient, and quickly generates resentment in those it is enforced upon. Pay up, or Burn! hasn’t really been done in practice since the Middle Ages.
Voluntary Opt-In Government Services: Fire and Police won’t visit your house if you haven’t opted in and paid. Some places in the United States already have government services like this.
Please leave your thoughts in the comments if you have anything you’d like to add.