The following is an excerpt from my upcoming book Money, Sex, Power & Faith.
“This planet has – or rather had – a problem, which was this:
most of the people living on it were unhappy for pretty much of the time.
Many solutions were suggested for this problem,
but most of these were largely concerned
with the movement of small green pieces of paper,
which was odd because on the whole
it wasn’t the small green pieces of paper that were unhappy.”
– Douglas Adams, The Hitchhiker’s Guide to the Galaxy
Although America is often noted for the high ideals of life, liberty, and the pursuit of happiness that Thomas Jefferson poetically worked into the Declaration of Independence, it may very well be that its greatest contribution to the world was money, or at least the more tangible use of it. Since its creation, the US dollar has come to be the de facto currency throughout the world as the United States has become the largest economy on the planet. From the growth of tobacco and its use as a currency in the wake of being denied the right to print their own coins or paper currencies, America has arguably made economic development and the proliferation of money its highest goal and most successful industry.
“When people think about money, it is generally to wish they had more of it,” explains Jason Goodwin in Greenback: The Almighty Dollar and the Invention of America. “Americans made this their starting point, and experimented with money as no other nation ever had the chance to: wampum, paper currency, private banknotes, gold and silver, government money, bank money. On the way, the people learned to strike a deal, fix a price, watch their interests. They learned how to conjure money not out of the thin air exactly, but out of the natural riches of the land and the ingenuity of their own minds, and fell to arguing how much, relatively speaking, it was worth. Settling that dispute, over the years, defined them as a nation. To get where we are today has meant ironing out a lot of differences, or ironing them, at least, deceptively flat.”108
The importance of money in America is apparent by the fact that the US Mint was the first building authorized by the new US Government. After Congress established the dollar as the unit of account for the country, in the hopes of phasing out other foreign currencies over the next three years, the first coins to be circulated were 11,178 copper pennies in 1793. Once the Mint opened the next year, it got busy creating ten different denominations of coin, ranging from a half cent to 10$.
The government had also printed 240 million dollars’ worth of paper money to assist with the war in 1777, a bill called the Continental. But people were wary of paper money and had more faith in the coins made of silver, copper, and gold.
“People were coming face-to-face with paper money for the first time in Western history,” Goodwin explains, “and they weren’t all ready to make the conceptual leap. You could bite on the best Spanish silver. Even wampum had had some weight, and a heap of money was a heap. Paper was worthless – ‘say what you like,’ an old Pennsylvanian grumbled, ‘but paper is paper and money is money.’”
Plus, technically, the Constitution hadn’t granted the federal government the right to print paper money, only coins. By the end of the war, the Continental was virtually worthless. Nevertheless, the First United States Bank was granted the power to mint coins through its run until 1811, as was the Second United States Bank through 1836. But when Andrew Jackson vetoed its continued charter, the “Free Banking Era” saw state-chartered banks issuing their own paper bank notes with no federal oversight whatsoever. The result was an estimated 8,000 different paper notes of all shapes and sizes making their way into circulation by 1860, creating a huge boon for counterfeiters, with an estimated one third of the “money” in circulation being counterfeit.
The federal government tried to get a handle on the matter by suspending the practice of redeeming paper money for coins and by issuing a few other paper currencies themselves, the Demand Note and the Legal Tender Note, largely as a way to fund the Civil War. On the day he was assassinated, April 14, 1865, Abraham Lincoln authorized the creation of the Secret Service to combat the surge of counterfeiting. The organization wouldn’t offer full-time presidential protection until after William McKinley was killed in 1901. After Congress passed the National Banking Act in 1863, finally establishing a national banking system and a uniform national currency, the US printed over 400 million dollars in fresh, new currency by the end of the decade.
The new national currency, often called Greenbacks, wasn’t really money per se, but a form of fiat currency that holders could use as legal tender, but which would, like its predecessors, eventually completely lose its value. As Adam Smith had warned, “The problem with fiat money is that it rewards the minority that can handle money, but fools the generation that has worked and saved money.”29
Over the next few decades, the government would release a few different types of promissory notes that would serve as legal tender, including silver certificates and gold certificates, redeemable for their respective metal inspiration. Ultimately, as has been the case with money since its inception, the government was just making things up as it went along. Unfortunately, they were finding that it wasn’t providing as much security as people hoped.
When Congress first convened in 1791, there were only four banks in existence in the United States. In the next ten years, another twenty-five opened, and by 1921, after the “Free Banking Era”, they had exploded to 30,000.
“Money had become one of their tools,” wrote Goodwin, “a wonderful telescope that reduced the most baffling and impenetrable landscape to a familiar scale and brought colonists a sense of control over what was otherwise a tangled thicket, full of surprises. Beaver in the woods had prices on their heads; a deerskin went for around one dollar, still called a buck; forests were convertible into lumber by the cubic feet; land could be fenced, sold, and mortgaged; a whole emerging system ensured that the mysteries of America could be brought pretty rapidly to book, transferred, alienated, bought, and sold. The ‘hideous and desolate wilderness’ of the first settlers could be turned into a recognizably civilized landscape. In time, every particle of the continent might be pried from its setting and value, like a diamond.”
Yet between battles of ideology and the uncertainty of the as yet unexplored parameters of this new game of capitalism, organizing the New World still brought its own challenges. After the Civil War, though the federal government was doing all it could to create some sort of stability in the banking system, there were still a number of banking scares, like the crash of the New York Stock Exchange in 1901, and another 50% plummet in 1907.
The 1907 panic was subsided largely due to the seemingly heroic gesture of banker J.P. Morgan, who pledged his own money to bail out the bank and encouraged other bankers to do the same. However, a few years later, a congressional subcommittee called the Pujo Committee looked into the panics to find that a number of Wall Street bankers had been taking huge liberties with the trusts they had been given, with J.P. Morgan responsible for manipulating over 22 billion dollars alone. Although a handful of men had consolidated a vast amount of the nation’s wealth into their own hands, causing an economic recession and hardship for millions around the country, proving unequivocal flaws in Adam Smith’s theories of the virtues of man’s self-interest, the US government decided to add a few more precautionary measures to their system of capitalism.
In 1913, Congress passed the Federal Reserve Act, establishing the Federal Reserve Bank as the central bank of the United States, complete with twelve districts, each with its own reserve bank. While the Federal Reserve was initially commissioned with a twenty year charter, in 1927, the contract was re-negotiated so that the Federal Reserve Bank would manage the currency of the United States in perpetuity until Congress finds some reason for it not to. The problem is that the Federal Reserve Bank, according to the Constitution, has never really printed money, and the Federal Reserve Note, although currently accepted the world over as legal tender, is only a fiat currency which will one day be as worthless as the Continental and the Greenback.
Although the Constitution explicitly states that the government can only make money from coins, and the Coinage Act of 1792 stated those coins should be based on the dollar, which was based on 371 grains of pure silver or 416 grains of standard silver, what we consider money has come quite a ways since then. In 1900, William McKinley moved the dollar from silver to gold, a standard which held until 1933 when the Great Depression had created some incredibly ill effects on the economy. Franklin Roosevelt offered up just over 20$ per ounce for all persons who had been hoarding gold, taking in 770 million dollars worth of gold coins and gold certificates in just over a month before re-establishing the price of gold at 35$ an ounce. This allowed the Federal Reserve Bank to inflate the money supply and shore up for Roosevelt’s New Deal.
In 1944, delegates from the forty-four nations that had allied to form the United Nations after World War II gathered in Bretton Woods, New Hampshire to establish a monetary exchange rate, with gold as the primary exchange, largely represented by the US dollar. The agreement put the US in a great place, what the French Minister of Finance called “America’s exorbitant privilege”, to be able to print a 100$ bill for a few cents when other countries would actually have to pony up 100$ worth of gold. However, when West Germany finally decided to break bonds with the Bretton Woods agreement, and a number of other nations started coming for their gold, Richard Nixon devalued the dollar and removed it from the gold standard again in 1971. Initially, it was supposed to be a temporary measure lasting for only ninety days, but the decision held, and the US dollar has been a true fiat currency ever since.
Basically, a fiat currency is legal tender without intrinsic value. It’s only worth is found in the sweet spot where what the government says meets what the citizenry agrees to. Although they’ve been used effectively throughout the history of money, the average lifespan for a fiat currency is speculated to be about twenty-seven years, meaning that the US dollar is indeed living on borrowed time. Granted, the British Pound has been kicking since 1694, but considering the instability generated over the last decade or so, it would seem that the only thing keeping the dollar alive is faith.
In Biography of the Dollar, Craig Karmin quotes financial historian and publisher of Grant’s Interest Rate Observer, James Grant, as saying, “’The dollar is the greatest monetary achievement in the history of the world. It is a paper claim of no inherent value that is accepted on its face in every corner of the earth. There is nothing behind it but the idea of America.”109
“Even by the standards of a military and economic superpower,” Karmin wrote, “the dollar’s supremacy has been remarkable. While the US Economy accounts for about thirty percent of global gross domestic product and American companies compose nearly fifty percent of the world stock market capitalization, the dollar’s dominance is greater still. It figures in nearly ninety percent of all trades in the more than $3.2-trillion-a-day foreign exchange market. Nearly two-thirds of the world’s central bank reserves are held in dollars.”
To bolster this faith, in 1864, Congress had authorized the phrase “In God We Trust” to be used on the two cent coin after being petitioned by Reverend M. R. Watkinson to include some reference to God on our money in order to “relieve us from the ignominy of heathenism.” Eventually, in 1955, as America cowered in fear over the “red scare” and the inherent atheism of the communist movement, Congress saw fit to ensure that God was indeed a capitalist, agreeing to print “In God We Trust” on all US currency. Two years earlier, they had added “under God” to the Pledge of Allegiance, and two years later, Dwight Eisenhower declared “In God We Trust” as our national motto.
Nevertheless, as much trust as we might proclaim in God, we also have a tendency to hedge our bets.