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The American History Podcast

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Fake Money, Real Problems

Today’s consumers can be pretty confident that the cash in their pockets or the numbers shown in their bank accounts represent real money, legal tender that businesses anywhere will accept.

Not so in the America of the 1800’s. Among the many things that have changed between this day and that was the money that people carried in their wallets. It was printed by private banks instead of by the federal government.

Waltham Back $20 bill. Credit: Library of Congress.

Waltham Bank $20 bill. Credit: Library of Congress.

But the “private banks” of the 1800’s weren’t exactly the Bank of America’s of today. A lot of these were fly-by-night operations, each with its own currency designs, which meant there were hundreds of different currencies circulating. That made life a lot harder for merchants and a heck of a lot easier for counterfeiters.

That didn’t mean that counterfeiting wasn’t serious work, though. On the contrary, an intricate, sophisticated business sprouted up around creating and distributing fake money. The kind of operations that ran this business were far from the counterfeiters of popular imagination, working alone in their basements at night. A lot of the counterfeit notes came instead from one place: a dirt road called Cognac Street, right across the US border in Quebec. Cognac Street was a vast hive of activity– printers, engravers, people whose job it was to sign the false notes, to transport them up and down the East Coast, and pass them into circulation. There were rivals gangs, complex family alliances, and arson attacks on enemies. Here’s how our guest Steven Mihm, a historian at the University of Georgia, describes it:

 “This was not a small enterprise. It was one that actually bound people together across a vast, clandestine economy that spanned hundreds of miles– as far west as Indiana, as far south as Georgia. It was an economy that, in a very perverse way in its complexity, mimicked the genuine economy that was taking shape south of the border.”

All this begs the question: how was it possible that such a vast and shady operation was able to survive and thrive outside the reach of the law?

One explanation is that what the counterfeiters were doing didn’t really seem all that different from what some perfectly legal banks were up to. Private banks were popping up all over the place, each issuing its own money. The problem was that a lot of these banks were completely unreliable. There was hardly any government regulation, so many simply churned out as much cash as they wanted, regardless of whether or not they had the reserves to back it up. This meant that even real bank notes could turn out to be worthless. Here’s Steven 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?”

Some savvier merchants might have answered that question by pointing to a little book called “A Counterfeit Detector”. This was a book that supposedly listed every single banknote in circulation and explained the difference between good notes and bad ones, letting readers distinguish real money from fake. These explanations, however, tended towards the subjective and unhelpful. Mihm cites the Bank of Utica $3 bill as an example.

A bank of Utica $1 note. Do the horses look suspicious?

A Bank of Utica $1 note. Do the horses look suspicious?

“It gives you this endlessly bewildering description about how in the counterfeit, the horse looks vaguely suspicious. Whereas, in the genuine, it doesn’t.”

But when this book was the only standard of any kind for what was and wasn’t money, it’s no wonder it sold so well in the early 1800’s. In fact, it was knowledge that proved to be the best defense against being hurt by counterfeiting. As Steven Mihm explained 

“[The counterfeit money] 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.”

This problem of counterfeit money got so bad that during this era, as much as 30% of the money in some parts of the country was fake. Today, that number is just a fraction of a percentage point. What happened to trigger such a dramatic change?

Like so many other things in American history, the tradition of counterfeit money was transformed by the Civil War. Before the war, there were as many as 10,000 different kinds of paper money in circulation. While this worked fine for people who just needed to make everyday transactions, it was hardly feasible for the federal government to acquire the hodge-podge of different banks’ notes necessary to pay massive war expenses. Steven Mihm again:

"Running the Machine"- a Civil War era political cartoon highlighting distrust of the government and its "greenback machine." Credit: Library of Congress.

“Running the Machine”- a Civil War era political cartoon highlighting distrust of the government and its “greenback machine.” Credit: Library of Congress.

“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 [backed by law, not by a commodity] 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.”

Greenbacks presented a new, promising opportunity for counterfeiters, who could now prey not just on small, state charter banks, but on the federal government itself. The difference was that this “bank” fought back. With a public already skeptical about the new currency, counterfeiting could make the difference between greenbacks’ public failure or acceptance, and thus between the preservation or disunion of the nation. Realizing this, the federal government began a war on counterfeiting even as it battled the Confederacy. Its main weapon against the counterfeiters? An organization that quickly came to be known as the United States Secret Service.

But instead of protecting the president (something Lincoln definitely would have benefited from), this Secret Service protected the integrity of the national currency. It may not sound very glamorous, but as Steven Mihm put it:

 

Stereograph showing group of early Secret Service officers seated on a rock by a river. Library of Congress.

Stereograph showing a rather fearsome group of early Secret Service officers seated on a rock by a river. Library of Congress.

 

 “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.”

And crush it did. The Secret Service set a clear boundary between currency that was legal and illegal, a boundary that has survived to this day. So next time you pull out your wallet or your credit card, take a moment to thank the original Secret Service.

This is a segment from our episode on the history of deception in American history. You can listen to the whole episode here.